Correlation Between Small Cap and Rational Defensive

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

Diversification Opportunities for Small Cap and Rational Defensive

0.94

Correlation Coefficient

Small Cap  Rational Defensive

Almost no diversification

The 3 months correlation between Small and Rational is 0.94. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Equity and Rational Defensive Growth in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Rational Defensive Growth 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 Rational Defensive. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Rational Defensive Growth has no effect on the direction of Small Cap i.e., Small Cap and Rational Defensive go up and down completely randomly.

Pair Corralation between Small Cap and Rational Defensive

Assuming the 90 days horizon Small Cap Equity is expected to generate 0.89 times more return on investment than Rational Defensive. However, Small Cap Equity is 1.12 times less risky than Rational Defensive. It trades about -0.12 of its potential returns per unit of risk. Rational Defensive Growth is currently generating about -0.1 per unit of risk. If you would invest  1,783  in Small Cap Equity on December 29, 2024 and sell it today you would lose (146.00) from holding Small Cap Equity or give up 8.19% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Strong
Accuracy	98.39%
Values	Daily Returns

Small Cap Equity  vs.  Rational Defensive Growth

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.

Rational Defensive Growth

Risk-Adjusted Performance

Very Weak

Over the last 90 days Rational Defensive Growth has generated negative risk-adjusted returns adding no value to fund investors. In spite of latest weak performance, the Fund's 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 Rational Defensive

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

The idea behind Small Cap Equity and Rational Defensive Growth 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 Funds Screener module to find actively-traded funds from around the world traded on over 30 global exchanges.