Correlation Between Small Cap and Black Oak

Can any of the company-specific risk be diversified away by investing in both Small Cap and Black Oak 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 Black Oak 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 Black Oak Emerging, you can compare the effects of market volatilities on Small Cap and Black Oak 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 Black Oak. Check out your portfolio center. Please also check ongoing floating volatility patterns of Small Cap and Black Oak.

Diversification Opportunities for Small Cap and Black Oak

0.76

Correlation Coefficient

Small Cap  Black Oak

Poor diversification

The 3 months correlation between Small and Black is 0.76. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Equity and Black Oak Emerging in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Black Oak Emerging 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 Black Oak. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Black Oak Emerging has no effect on the direction of Small Cap i.e., Small Cap and Black Oak go up and down completely randomly.

Pair Corralation between Small Cap and Black Oak

Assuming the 90 days horizon Small Cap Equity is expected to under-perform the Black Oak. But the mutual fund apears to be less risky and, when comparing its historical volatility, Small Cap Equity is 1.2 times less risky than Black Oak. The mutual fund trades about -0.09 of its potential returns per unit of risk. The Black Oak Emerging is currently generating about -0.03 of returns per unit of risk over similar time horizon. If you would invest  726.00  in Black Oak Emerging on December 28, 2024 and sell it today you would lose (21.00) from holding Black Oak Emerging or give up 2.89% of portfolio value over 90 days.

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

Small Cap Equity  vs.  Black Oak Emerging

Small Cap Equity

Risk-Adjusted Performance

Very Weak

Over the last 90 days Small Cap Equity 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.

Black Oak Emerging

Risk-Adjusted Performance

Very Weak

Over the last 90 days Black Oak Emerging has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, Black Oak 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 Black Oak

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

The idea behind Small Cap Equity and Black Oak Emerging 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 Positions Ratings module to determine portfolio positions ratings based on digital equity recommendations. Macroaxis instant position ratings are based on combination of fundamental analysis and risk-adjusted market performance.