Correlation Between Medium Duration and Smallcap Growth

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

By analyzing existing cross correlation between Medium Duration Bond Institutional and Smallcap Growth Fund, you can compare the effects of market volatilities on Medium Duration and Smallcap Growth 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 Medium Duration with a short position of Smallcap Growth. Check out your portfolio center. Please also check ongoing floating volatility patterns of Medium Duration and Smallcap Growth.

Diversification Opportunities for Medium Duration and Smallcap Growth

-0.55

Correlation Coefficient

Medium Duration  Smallcap Growth

Excellent diversification

The 3 months correlation between Medium and Smallcap is -0.55. Overlapping area represents the amount of risk that can be diversified away by holding Medium Duration Bond Instituti and Smallcap Growth Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Smallcap Growth and Medium Duration 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 Medium Duration Bond Institutional are associated (or correlated) with Smallcap Growth. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Smallcap Growth has no effect on the direction of Medium Duration i.e., Medium Duration and Smallcap Growth go up and down completely randomly.

Pair Corralation between Medium Duration and Smallcap Growth

Assuming the 90 days horizon Medium Duration is expected to generate 35.53 times less return on investment than Smallcap Growth. But when comparing it to its historical volatility, Medium Duration Bond Institutional is 2.8 times less risky than Smallcap Growth. It trades about 0.01 of its potential returns per unit of risk. Smallcap Growth Fund is currently generating about 0.16 of returns per unit of risk over similar time horizon. If you would invest  1,628  in Smallcap Growth Fund on September 18, 2024 and sell it today you would earn a total of  49.00  from holding Smallcap Growth Fund or generate 3.01% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Very Weak
Accuracy	95.24%
Values	Daily Returns

Medium Duration Bond Instituti  vs.  Smallcap Growth Fund

Medium Duration Bond

Risk-Adjusted Performance

0 of 100

Very Weak

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

Smallcap Growth

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Smallcap Growth Fund are ranked lower than 8 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Smallcap Growth may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Medium Duration and Smallcap Growth

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

The idea behind Medium Duration Bond Institutional and Smallcap Growth Fund 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 Watchlist Optimization module to optimize watchlists to build efficient portfolios or rebalance existing positions based on the mean-variance optimization algorithm.