Correlation Between Small Cap and College Retirement

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

Diversification Opportunities for Small Cap and College Retirement

0.47

Correlation Coefficient

Small Cap  College Retirement

Very weak diversification

The 3 months correlation between Small and College is 0.47. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Equity and College Retirement Equities in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on College Retirement 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 College Retirement. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of College Retirement has no effect on the direction of Small Cap i.e., Small Cap and College Retirement go up and down completely randomly.

Pair Corralation between Small Cap and College Retirement

Assuming the 90 days horizon Small Cap is expected to generate 2.75 times less return on investment than College Retirement. In addition to that, Small Cap is 1.52 times more volatile than College Retirement Equities. It trades about 0.02 of its total potential returns per unit of risk. College Retirement Equities is currently generating about 0.09 per unit of volatility. If you would invest  25,000  in College Retirement Equities on October 25, 2024 and sell it today you would earn a total of  10,216  from holding College Retirement Equities or generate 40.86% 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.  College Retirement Equities

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.

College Retirement

Risk-Adjusted Performance

7 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in College Retirement Equities are ranked lower than 7 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong technical and fundamental indicators, College Retirement 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 College Retirement

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

The idea behind Small Cap Equity and College Retirement Equities 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 Portfolio Comparator module to compare the composition, asset allocations and performance of any two portfolios in your account.