Correlation Between Small Cap and Growth Allocation

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

Diversification Opportunities for Small Cap and Growth Allocation

0.44

Correlation Coefficient

Small Cap  Growth Allocation

Very weak diversification

The 3 months correlation between Small and Growth is 0.44. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Equity and Growth Allocation Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Growth Allocation 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 Growth Allocation. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Growth Allocation has no effect on the direction of Small Cap i.e., Small Cap and Growth Allocation go up and down completely randomly.

Pair Corralation between Small Cap and Growth Allocation

Assuming the 90 days horizon Small Cap Equity is expected to under-perform the Growth Allocation. In addition to that, Small Cap is 1.73 times more volatile than Growth Allocation Fund. It trades about -0.12 of its total potential returns per unit of risk. Growth Allocation Fund is currently generating about 0.01 per unit of volatility. If you would invest  1,267  in Growth Allocation Fund on December 29, 2024 and sell it today you would earn a total of  1.00  from holding Growth Allocation Fund or generate 0.08% 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.  Growth Allocation Fund

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.

Growth Allocation

Risk-Adjusted Performance

Very Weak

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

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

The idea behind Small Cap Equity and Growth Allocation 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.

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.