Correlation Between Small Cap and Pimco Real

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

Diversification Opportunities for Small Cap and Pimco Real

0.72

Correlation Coefficient

Small Cap  Pimco Real

Poor diversification

The 3 months correlation between Small and Pimco is 0.72. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Equity and Pimco Real Return in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Pimco Real Return 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 Pimco Real. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Pimco Real Return has no effect on the direction of Small Cap i.e., Small Cap and Pimco Real go up and down completely randomly.

Pair Corralation between Small Cap and Pimco Real

Assuming the 90 days horizon Small Cap is expected to generate 9.43 times less return on investment than Pimco Real. But when comparing it to its historical volatility, Small Cap Equity is 7.68 times less risky than Pimco Real. It trades about 0.02 of its potential returns per unit of risk. Pimco Real Return is currently generating about 0.03 of returns per unit of risk over similar time horizon. If you would invest  1,263  in Pimco Real Return on October 25, 2024 and sell it today you would lose (102.00) from holding Pimco Real Return or give up 8.08% 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.  Pimco Real Return

Small Cap Equity

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Small Cap Equity are ranked lower than 2 (%) of all funds and portfolios of funds over the last 90 days. 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.

Pimco Real Return

Risk-Adjusted Performance

0 of 100

Very Weak

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

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

The idea behind Small Cap Equity and Pimco Real Return 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 Pattern Recognition module to use different Pattern Recognition models to time the market across multiple global exchanges.