Correlation Between Us Government and Small Cap

Can any of the company-specific risk be diversified away by investing in both Us Government and Small Cap 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 Us Government and Small Cap into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Us Government Plus and Small Cap Value Profund, you can compare the effects of market volatilities on Us Government and Small Cap 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 Us Government with a short position of Small Cap. Check out your portfolio center. Please also check ongoing floating volatility patterns of Us Government and Small Cap.

Diversification Opportunities for Us Government and Small Cap

-0.5

Correlation Coefficient

Us Government  Small Cap

Very good diversification

The 3 months correlation between GVPIX and Small is -0.5. Overlapping area represents the amount of risk that can be diversified away by holding Us Government Plus and Small Cap Value Profund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Cap Value and Us Government 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 Us Government Plus are associated (or correlated) with Small Cap. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Small Cap Value has no effect on the direction of Us Government i.e., Us Government and Small Cap go up and down completely randomly.

Pair Corralation between Us Government and Small Cap

Assuming the 90 days horizon Us Government Plus is expected to under-perform the Small Cap. But the mutual fund apears to be less risky and, when comparing its historical volatility, Us Government Plus is 1.06 times less risky than Small Cap. The mutual fund trades about -0.02 of its potential returns per unit of risk. The Small Cap Value Profund is currently generating about 0.03 of returns per unit of risk over similar time horizon. If you would invest  8,136  in Small Cap Value Profund on September 17, 2024 and sell it today you would earn a total of  973.00  from holding Small Cap Value Profund or generate 11.96% return on investment over 90 days.

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

Us Government Plus  vs.  Small Cap Value Profund

Us Government Plus

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Us Government Plus 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 forward indicators remain fairly strong which may send shares a bit higher in January 2025. The current disturbance may also be a sign of long term up-swing for the fund investors.

Small Cap Value

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Small Cap Value Profund are ranked lower than 7 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Small Cap may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Us Government and Small Cap

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

The idea behind Us Government Plus and Small Cap Value Profund 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 Theme Ratings module to determine theme ratings based on digital equity recommendations. Macroaxis theme ratings are based on combination of fundamental analysis and risk-adjusted market performance.