Correlation Between Highland Merger and Highland Small

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

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

Diversification Opportunities for Highland Merger and Highland Small

0.62

Correlation Coefficient

Highland Merger  Highland Small

Poor diversification

The 3 months correlation between Highland and Highland is 0.62. Overlapping area represents the amount of risk that can be diversified away by holding Highland Merger Arbitrage and Highland Small Cap Equity in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Highland Small Cap and Highland Merger 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 Highland Merger Arbitrage are associated (or correlated) with Highland Small. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Highland Small Cap has no effect on the direction of Highland Merger i.e., Highland Merger and Highland Small go up and down completely randomly.

Pair Corralation between Highland Merger and Highland Small

Assuming the 90 days horizon Highland Merger is expected to generate 9.73 times less return on investment than Highland Small. But when comparing it to its historical volatility, Highland Merger Arbitrage is 4.26 times less risky than Highland Small. It trades about 0.06 of its potential returns per unit of risk. Highland Small Cap Equity is currently generating about 0.14 of returns per unit of risk over similar time horizon. If you would invest  547.00  in Highland Small Cap Equity on September 13, 2024 and sell it today you would earn a total of  45.00  from holding Highland Small Cap Equity or generate 8.23% return on investment over 90 days.

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

Highland Merger Arbitrage  vs.  Highland Small Cap Equity

Highland Merger Arbitrage

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Highland Merger Arbitrage are ranked lower than 4 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Highland Merger is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Highland Small Cap

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Highland Small Cap Equity are ranked lower than 11 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Highland Small may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Highland Merger and Highland Small

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

The idea behind Highland Merger Arbitrage and Highland Small Cap 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 Comparator module to compare the composition, asset allocations and performance of any two portfolios in your account.