Correlation Between Small Cap and Enhanced Fixed

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

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

Diversification Opportunities for Small Cap and Enhanced Fixed

0.59

Correlation Coefficient

Small Cap  Enhanced Fixed

Very weak diversification

The 3 months correlation between Small and Enhanced is 0.59. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Equity and Enhanced Fixed Income in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Enhanced Fixed Income and Small Cap 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 Small Cap Equity are associated (or correlated) with Enhanced Fixed. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Enhanced Fixed Income has no effect on the direction of Small Cap i.e., Small Cap and Enhanced Fixed go up and down completely randomly.

Pair Corralation between Small Cap and Enhanced Fixed

Assuming the 90 days horizon Small Cap Equity is expected to generate 3.91 times more return on investment than Enhanced Fixed. However, Small Cap is 3.91 times more volatile than Enhanced Fixed Income. It trades about 0.02 of its potential returns per unit of risk. Enhanced Fixed Income is currently generating about 0.0 per unit of risk. If you would invest  1,853  in Small Cap Equity on October 24, 2024 and sell it today you would earn a total of  30.00  from holding Small Cap Equity or generate 1.62% return on investment over 90 days.

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

Small Cap Equity  vs.  Enhanced Fixed Income

Small Cap Equity

Risk-Adjusted Performance

2 of 100

Very Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Small Cap Equity are ranked lower than 2 (%) of all funds and portfolios of funds over the last 90 days. 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.

Enhanced Fixed Income

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Enhanced Fixed Income are ranked lower than 4 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Enhanced Fixed is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Small Cap and Enhanced Fixed

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

The idea behind Small Cap Equity and Enhanced Fixed Income 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 Holdings module to check your current holdings and cash postion to detemine if your portfolio needs rebalancing.