Correlation Between Financials Ultrasector and Small Cap

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

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

Diversification Opportunities for Financials Ultrasector and Small Cap

0.66

Correlation Coefficient

Financials Ultrasector  Small Cap

Poor diversification

The 3 months correlation between Financials and Small is 0.66. Overlapping area represents the amount of risk that can be diversified away by holding Financials Ultrasector Profund and Small Cap Growth in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Cap Growth and Financials Ultrasector 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 Financials Ultrasector Profund are associated (or correlated) with Small Cap. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Small Cap Growth has no effect on the direction of Financials Ultrasector i.e., Financials Ultrasector and Small Cap go up and down completely randomly.

Pair Corralation between Financials Ultrasector and Small Cap

Assuming the 90 days horizon Financials Ultrasector Profund is expected to generate 1.29 times more return on investment than Small Cap. However, Financials Ultrasector is 1.29 times more volatile than Small Cap Growth. It trades about 0.02 of its potential returns per unit of risk. Small Cap Growth is currently generating about -0.08 per unit of risk. If you would invest  4,236  in Financials Ultrasector Profund on December 22, 2024 and sell it today you would earn a total of  39.00  from holding Financials Ultrasector Profund or generate 0.92% return on investment over 90 days.

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

Financials Ultrasector Profund  vs.  Small Cap Growth

Financials Ultrasector

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Financials Ultrasector Profund are ranked lower than 1 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong forward indicators, Financials Ultrasector is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Small Cap Growth

Risk-Adjusted Performance

Very Weak

Over the last 90 days Small Cap Growth has generated negative risk-adjusted returns adding no value to fund investors. In spite of latest weak performance, the Fund's fundamental 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 Financials Ultrasector and Small Cap

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

The idea behind Financials Ultrasector Profund and Small Cap Growth 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 Portfolio Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.