Correlation Between Large Cap and Buffalo Small

Can any of the company-specific risk be diversified away by investing in both Large Cap and Buffalo 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 Large Cap and Buffalo Small into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Large Cap Fund and Buffalo Small Cap, you can compare the effects of market volatilities on Large Cap and Buffalo 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 Large Cap with a short position of Buffalo Small. Check out your portfolio center. Please also check ongoing floating volatility patterns of Large Cap and Buffalo Small.

Diversification Opportunities for Large Cap and Buffalo Small

0.39

Correlation Coefficient

Large Cap  Buffalo Small

Weak diversification

The 3 months correlation between Large and Buffalo is 0.39. Overlapping area represents the amount of risk that can be diversified away by holding Large Cap Fund and Buffalo Small Cap in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Buffalo Small Cap and Large Cap 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 Large Cap Fund are associated (or correlated) with Buffalo Small. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Buffalo Small Cap has no effect on the direction of Large Cap i.e., Large Cap and Buffalo Small go up and down completely randomly.

Pair Corralation between Large Cap and Buffalo Small

Assuming the 90 days horizon Large Cap Fund is expected to generate 0.66 times more return on investment than Buffalo Small. However, Large Cap Fund is 1.51 times less risky than Buffalo Small. It trades about 0.04 of its potential returns per unit of risk. Buffalo Small Cap is currently generating about -0.12 per unit of risk. If you would invest  1,454  in Large Cap Fund on December 29, 2024 and sell it today you would earn a total of  26.00  from holding Large Cap Fund or generate 1.79% return on investment over 90 days.

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

Large Cap Fund  vs.  Buffalo Small Cap

Large Cap Fund

Risk-Adjusted Performance

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Large Cap Fund are ranked lower than 3 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong technical indicators, Large Cap is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Buffalo Small Cap

Risk-Adjusted Performance

Very Weak

Over the last 90 days Buffalo Small Cap has generated negative risk-adjusted returns adding no value to fund investors. In spite of latest weak performance, the Fund's basic indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the fund investors.

Pair Trading with Large Cap and Buffalo Small

The main advantage of trading using opposite Large Cap and Buffalo Small positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Large Cap position performs unexpectedly, Buffalo 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 Buffalo Small will offset losses from the drop in Buffalo Small's long position.

The idea behind Large Cap Fund and Buffalo 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.

Check out your portfolio center.

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 Bollinger Bands module to use Bollinger Bands indicator to analyze target price for a given investing horizon.