Correlation Between Small Cap and Longshort Portfolio

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

Diversification Opportunities for Small Cap and Longshort Portfolio

0.75

Correlation Coefficient

Small Cap  Longshort Portfolio

Poor diversification

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

Pair Corralation between Small Cap and Longshort Portfolio

Assuming the 90 days horizon Small Cap Equity is expected to generate 1.06 times more return on investment than Longshort Portfolio. However, Small Cap is 1.06 times more volatile than Longshort Portfolio Longshort. It trades about 0.03 of its potential returns per unit of risk. Longshort Portfolio Longshort is currently generating about -0.06 per unit of risk. If you would invest  3,237  in Small Cap Equity on October 7, 2024 and sell it today you would earn a total of  57.00  from holding Small Cap Equity or generate 1.76% return on investment over 90 days.

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

Small Cap Equity  vs.  Longshort Portfolio Longshort

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.

Longshort Portfolio

Risk-Adjusted Performance

0 of 100

Very Weak

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

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

The idea behind Small Cap Equity and Longshort Portfolio Longshort 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 Transaction History module to view history of all your transactions and understand their impact on performance.