Correlation Between Gmo Small and Small Cap

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

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

Diversification Opportunities for Gmo Small and Small Cap

0.9

Correlation Coefficient

Gmo Small  Small Cap

Almost no diversification

The 3 months correlation between Gmo and Small is 0.9. Overlapping area represents the amount of risk that can be diversified away by holding Gmo Small Cap 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 Gmo Small 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 Gmo Small Cap 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 Gmo Small i.e., Gmo Small and Small Cap go up and down completely randomly.

Pair Corralation between Gmo Small and Small Cap

Assuming the 90 days horizon Gmo Small Cap is expected to under-perform the Small Cap. But the mutual fund apears to be less risky and, when comparing its historical volatility, Gmo Small Cap is 1.19 times less risky than Small Cap. The mutual fund trades about -0.13 of its potential returns per unit of risk. The Small Cap Growth is currently generating about -0.07 of returns per unit of risk over similar time horizon. If you would invest  1,878  in Small Cap Growth on December 28, 2024 and sell it today you would lose (104.00) from holding Small Cap Growth or give up 5.54% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Strong
Accuracy	98.36%
Values	Daily Returns

Gmo Small Cap  vs.  Small Cap Growth

Gmo Small Cap

Risk-Adjusted Performance

Very Weak

Over the last 90 days Gmo 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.

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 fairly strong basic indicators, Small Cap is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Gmo Small and Small Cap

The main advantage of trading using opposite Gmo Small and Small Cap positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Gmo Small 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 Gmo Small Cap 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 Instant Ratings module to determine any equity ratings based on digital recommendations. Macroaxis instant equity ratings are based on combination of fundamental analysis and risk-adjusted market performance.