Correlation Between Small Cap and Quantitative Longshort

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

Diversification Opportunities for Small Cap and Quantitative Longshort

0.87

Correlation Coefficient

Small Cap  Quantitative Longshort

Very poor diversification

The 3 months correlation between Small and Quantitative is 0.87. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Equity and Quantitative Longshort Equity in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Quantitative Longshort 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 Quantitative Longshort. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Quantitative Longshort has no effect on the direction of Small Cap i.e., Small Cap and Quantitative Longshort go up and down completely randomly.

Pair Corralation between Small Cap and Quantitative Longshort

Assuming the 90 days horizon Small Cap Equity is expected to under-perform the Quantitative Longshort. But the mutual fund apears to be less risky and, when comparing its historical volatility, Small Cap Equity is 1.63 times less risky than Quantitative Longshort. The mutual fund trades about -0.5 of its potential returns per unit of risk. The Quantitative Longshort Equity is currently generating about -0.23 of returns per unit of risk over similar time horizon. If you would invest  1,472  in Quantitative Longshort Equity on September 24, 2024 and sell it today you would lose (129.00) from holding Quantitative Longshort Equity or give up 8.76% of portfolio value over 90 days.

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

Small Cap Equity  vs.  Quantitative Longshort Equity

Small Cap Equity

Risk-Adjusted Performance

0 of 100

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.

Quantitative Longshort

Risk-Adjusted Performance

0 of 100

Very Weak

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

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

The idea behind Small Cap Equity and Quantitative Longshort 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.

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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 Economic Indicators module to top statistical indicators that provide insights into how an economy is performing.