Correlation Between Small Company and Short Term

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

By analyzing existing cross correlation between Small Company Stock Fund and Short Term Bond Fund, you can compare the effects of market volatilities on Small Company and Short Term 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 Company with a short position of Short Term. Check out your portfolio center. Please also check ongoing floating volatility patterns of Small Company and Short Term.

Diversification Opportunities for Small Company and Short Term

-0.51

Correlation Coefficient

Small Company  Short Term

Excellent diversification

The 3 months correlation between Small and Short is -0.51. Overlapping area represents the amount of risk that can be diversified away by holding Small Company Stock Fund and Short Term Bond Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Short Term Bond and Small Company 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 Company Stock Fund are associated (or correlated) with Short Term. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Short Term Bond has no effect on the direction of Small Company i.e., Small Company and Short Term go up and down completely randomly.

Pair Corralation between Small Company and Short Term

Assuming the 90 days horizon Small Company Stock Fund is expected to generate 7.82 times more return on investment than Short Term. However, Small Company is 7.82 times more volatile than Short Term Bond Fund. It trades about 0.15 of its potential returns per unit of risk. Short Term Bond Fund is currently generating about -0.08 per unit of risk. If you would invest  2,605  in Small Company Stock Fund on September 15, 2024 and sell it today you would earn a total of  287.00  from holding Small Company Stock Fund or generate 11.02% return on investment over 90 days.

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

Small Company Stock Fund  vs.  Short Term Bond Fund

Small Stock Fund

Risk-Adjusted Performance

11 of 100

Good

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

Short Term Bond

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Short Term Bond Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong fundamental drivers, Short Term 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 Company and Short Term

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

The idea behind Small Company Stock Fund and Short Term Bond Fund 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 Money Managers module to screen money managers from public funds and ETFs managed around the world.