Correlation Between Small Cap and Balanced Fund

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

Diversification Opportunities for Small Cap and Balanced Fund

0.88

Correlation Coefficient

Small Cap  Balanced Fund

Very poor diversification

The 3 months correlation between Small and Balanced is 0.88. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Equity and Balanced Fund Retail in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Balanced Fund Retail 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 Balanced Fund. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Balanced Fund Retail has no effect on the direction of Small Cap i.e., Small Cap and Balanced Fund go up and down completely randomly.

Pair Corralation between Small Cap and Balanced Fund

Assuming the 90 days horizon Small Cap Equity is expected to under-perform the Balanced Fund. But the mutual fund apears to be less risky and, when comparing its historical volatility, Small Cap Equity is 1.35 times less risky than Balanced Fund. The mutual fund trades about -0.21 of its potential returns per unit of risk. The Balanced Fund Retail is currently generating about -0.13 of returns per unit of risk over similar time horizon. If you would invest  1,446  in Balanced Fund Retail on November 29, 2024 and sell it today you would lose (170.00) from holding Balanced Fund Retail or give up 11.76% of portfolio value over 90 days.

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

Small Cap Equity  vs.  Balanced Fund Retail

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 weak performance in the last few months, the Fund's basic indicators remain fairly strong which may send shares a bit higher in March 2025. The current disturbance may also be a sign of long term up-swing for the fund investors.

Balanced Fund Retail

Risk-Adjusted Performance

Very Weak

Over the last 90 days Balanced Fund Retail has generated negative risk-adjusted returns adding no value to fund investors. In spite of latest weak performance, the Fund's technical and fundamental indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the fund investors.

Pair Trading with Small Cap and Balanced Fund

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

The idea behind Small Cap Equity and Balanced Fund Retail 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 Bonds Directory module to find actively traded corporate debentures issued by US companies.