Correlation Between Small Cap and Goldman Sachs

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

Diversification Opportunities for Small Cap and Goldman Sachs

0.01

Correlation Coefficient

Small Cap  Goldman Sachs

Significant diversification

The 3 months correlation between Small and Goldman is 0.01. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Equity and Goldman Sachs Enhanced in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Goldman Sachs Enhanced 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 Goldman Sachs. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Goldman Sachs Enhanced has no effect on the direction of Small Cap i.e., Small Cap and Goldman Sachs go up and down completely randomly.

Pair Corralation between Small Cap and Goldman Sachs

Assuming the 90 days horizon Small Cap Equity is expected to generate 12.24 times more return on investment than Goldman Sachs. However, Small Cap is 12.24 times more volatile than Goldman Sachs Enhanced. It trades about 0.03 of its potential returns per unit of risk. Goldman Sachs Enhanced is currently generating about 0.21 per unit of risk. If you would invest  1,590  in Small Cap Equity on October 11, 2024 and sell it today you would earn a total of  204.00  from holding Small Cap Equity or generate 12.83% return on investment over 90 days.

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

Small Cap Equity  vs.  Goldman Sachs Enhanced

Small Cap Equity

Risk-Adjusted Performance

0 of 100

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 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.

Goldman Sachs Enhanced

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Goldman Sachs Enhanced are ranked lower than 8 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong forward indicators, Goldman Sachs 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 Goldman Sachs

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

The idea behind Small Cap Equity and Goldman Sachs Enhanced 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 Idea Breakdown module to analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes.