Correlation Between Gmo International and Gmo Small

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

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

Diversification Opportunities for Gmo International and Gmo Small

-0.48

Correlation Coefficient

Gmo International  Gmo Small

Very good diversification

The 3 months correlation between Gmo and Gmo is -0.48. Overlapping area represents the amount of risk that can be diversified away by holding Gmo International Equity and Gmo Small Cap in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Gmo Small Cap and Gmo International 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 International Equity are associated (or correlated) with Gmo Small. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Gmo Small Cap has no effect on the direction of Gmo International i.e., Gmo International and Gmo Small go up and down completely randomly.

Pair Corralation between Gmo International and Gmo Small

Assuming the 90 days horizon Gmo International is expected to generate 14.84 times less return on investment than Gmo Small. But when comparing it to its historical volatility, Gmo International Equity is 1.22 times less risky than Gmo Small. It trades about 0.01 of its potential returns per unit of risk. Gmo Small Cap is currently generating about 0.07 of returns per unit of risk over similar time horizon. If you would invest  2,460  in Gmo Small Cap on September 15, 2024 and sell it today you would earn a total of  248.00  from holding Gmo Small Cap or generate 10.08% return on investment over 90 days.

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

Gmo International Equity  vs.  Gmo Small Cap

Gmo International Equity

Risk-Adjusted Performance

0 of 100

Very Weak

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

Gmo Small Cap

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Gmo Small Cap are ranked lower than 7 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Gmo Small may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Gmo International and Gmo Small

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

The idea behind Gmo International Equity and Gmo 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 Portfolio Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.