Correlation Between Small Cap and Touchstone International

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

Diversification Opportunities for Small Cap and Touchstone International

-0.75

Correlation Coefficient

Small Cap  Touchstone International

Pay attention - limited upside

The 3 months correlation between Small and Touchstone is -0.75. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Equity and Touchstone International Equit in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Touchstone International 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 Touchstone International. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Touchstone International has no effect on the direction of Small Cap i.e., Small Cap and Touchstone International go up and down completely randomly.

Pair Corralation between Small Cap and Touchstone International

Assuming the 90 days horizon Small Cap Equity is expected to under-perform the Touchstone International. In addition to that, Small Cap is 1.28 times more volatile than Touchstone International Equity. It trades about -0.09 of its total potential returns per unit of risk. Touchstone International Equity is currently generating about 0.26 per unit of volatility. If you would invest  1,370  in Touchstone International Equity on December 30, 2024 and sell it today you would earn a total of  206.00  from holding Touchstone International Equity or generate 15.04% return on investment over 90 days.

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

Small Cap Equity  vs.  Touchstone International Equit

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 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.

Touchstone International

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Touchstone International Equity are ranked lower than 20 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak forward indicators, Touchstone International showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Small Cap and Touchstone International

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

The idea behind Small Cap Equity and Touchstone International Equity 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 Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.