Correlation Between Dreyfus Government and Franklin Small

Can any of the company-specific risk be diversified away by investing in both Dreyfus Government and Franklin Small at the same time? Although using a correlation coefficient on its own may not help to predict future stock returns, this module helps to understand the diversifiable risk of combining Dreyfus Government and Franklin Small into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Dreyfus Government Cash and Franklin Small Cap, you can compare the effects of market volatilities on Dreyfus Government and Franklin Small and check how they will diversify away market risk if combined in the same portfolio for a given time horizon. You can also utilize pair trading strategies of matching a long position in Dreyfus Government with a short position of Franklin Small. Check out your portfolio center. Please also check ongoing floating volatility patterns of Dreyfus Government and Franklin Small.

Diversification Opportunities for Dreyfus Government and Franklin Small

0.66

Correlation Coefficient

Dreyfus Government  Franklin Small

Poor diversification

The 3 months correlation between Dreyfus and Franklin is 0.66. Overlapping area represents the amount of risk that can be diversified away by holding Dreyfus Government Cash and Franklin Small Cap in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Franklin Small Cap and Dreyfus Government is a relative statistical measure of the degree to which these equity instruments tend to move together. The correlation coefficient measures the extent to which returns on Dreyfus Government Cash are associated (or correlated) with Franklin Small. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Franklin Small Cap has no effect on the direction of Dreyfus Government i.e., Dreyfus Government and Franklin Small go up and down completely randomly.

Pair Corralation between Dreyfus Government and Franklin Small

Assuming the 90 days horizon Dreyfus Government is expected to generate 15.98 times less return on investment than Franklin Small. But when comparing it to its historical volatility, Dreyfus Government Cash is 8.89 times less risky than Franklin Small. It trades about 0.13 of its potential returns per unit of risk. Franklin Small Cap is currently generating about 0.23 of returns per unit of risk over similar time horizon. If you would invest  2,439  in Franklin Small Cap on September 5, 2024 and sell it today you would earn a total of  416.00  from holding Franklin Small Cap or generate 17.06% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	100.0%
Values	Daily Returns

Dreyfus Government Cash  vs.  Franklin Small Cap

Dreyfus Government Cash

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Dreyfus Government Cash are ranked lower than 9 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Dreyfus Government is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Franklin Small Cap

Risk-Adjusted Performance

17 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Franklin Small Cap are ranked lower than 17 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Franklin Small showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Dreyfus Government and Franklin Small

The main advantage of trading using opposite Dreyfus Government and Franklin Small positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Dreyfus Government position performs unexpectedly, Franklin Small can make up some of the losses. Pair trading also minimizes risk from directional movements in the market. For example, if an entire industry or sector drops because of unexpected headlines, the short position in Franklin Small will offset losses from the drop in Franklin Small's long position.

The idea behind Dreyfus Government Cash and Franklin Small Cap pairs trading is to make the combined position market-neutral, meaning the overall market's direction will not affect its win or loss (or potential downside or upside). This can be achieved by designing a pairs trade with two highly correlated stocks or equities that operate in a similar space or sector, making it possible to obtain profits through simple and relatively low-risk investment.

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Note that this page's information should be used as a complementary analysis to find the right mix of equity instruments to add to your existing portfolios or create a brand new portfolio. You can also try the Correlation Analysis module to reduce portfolio risk simply by holding instruments which are not perfectly correlated.