Correlation Between Franklin Lifesmart and Century Small

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

By analyzing existing cross correlation between Franklin Lifesmart 2045 and Century Small Cap, you can compare the effects of market volatilities on Franklin Lifesmart and Century 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 Franklin Lifesmart with a short position of Century Small. Check out your portfolio center. Please also check ongoing floating volatility patterns of Franklin Lifesmart and Century Small.

Diversification Opportunities for Franklin Lifesmart and Century Small

0.75

Correlation Coefficient

Franklin Lifesmart  Century Small

Poor diversification

The 3 months correlation between Franklin and Century is 0.75. Overlapping area represents the amount of risk that can be diversified away by holding Franklin Lifesmart 2045 and Century Small Cap in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Century Small Cap and Franklin Lifesmart 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 Franklin Lifesmart 2045 are associated (or correlated) with Century Small. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Century Small Cap has no effect on the direction of Franklin Lifesmart i.e., Franklin Lifesmart and Century Small go up and down completely randomly.

Pair Corralation between Franklin Lifesmart and Century Small

Assuming the 90 days horizon Franklin Lifesmart is expected to generate 1.25 times less return on investment than Century Small. But when comparing it to its historical volatility, Franklin Lifesmart 2045 is 1.69 times less risky than Century Small. It trades about 0.09 of its potential returns per unit of risk. Century Small Cap is currently generating about 0.07 of returns per unit of risk over similar time horizon. If you would invest  2,817  in Century Small Cap on September 21, 2024 and sell it today you would earn a total of  1,236  from holding Century Small Cap or generate 43.88% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	99.8%
Values	Daily Returns

Franklin Lifesmart 2045  vs.  Century Small Cap

Franklin Lifesmart 2045

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Franklin Lifesmart 2045 has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, Franklin Lifesmart is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Century Small Cap

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Century Small Cap has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, Century Small is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Franklin Lifesmart and Century Small

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

The idea behind Franklin Lifesmart 2045 and Century 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 Price Transformation module to use Price Transformation models to analyze the depth of different equity instruments across global markets.