Correlation Between Small Cap and Global Real

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

Diversification Opportunities for Small Cap and Global Real

-0.24

Correlation Coefficient

Small Cap  Global Real

Very good diversification

The 3 months correlation between Small and GLOBAL is -0.24. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Equity and Global Real Estate in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Global Real Estate 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 Global Real. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Global Real Estate has no effect on the direction of Small Cap i.e., Small Cap and Global Real go up and down completely randomly.

Pair Corralation between Small Cap and Global Real

Assuming the 90 days horizon Small Cap Equity is expected to under-perform the Global Real. In addition to that, Small Cap is 1.85 times more volatile than Global Real Estate. It trades about -0.39 of its total potential returns per unit of risk. Global Real Estate is currently generating about 0.25 per unit of volatility. If you would invest  911.00  in Global Real Estate on December 5, 2024 and sell it today you would earn a total of  26.00  from holding Global Real Estate or generate 2.85% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	95.45%
Values	Daily Returns

Small Cap Equity  vs.  Global Real Estate

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 weak performance in the last few months, the Fund's basic indicators remain fairly strong which may send shares a bit higher in April 2025. The current disturbance may also be a sign of long term up-swing for the fund investors.

Global Real Estate

Risk-Adjusted Performance

Very Weak

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

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

The idea behind Small Cap Equity and Global Real Estate 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 Fundamental Analysis module to view fundamental data based on most recent published financial statements.