Correlation Between Regional Bank and Small Cap

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

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

Diversification Opportunities for Regional Bank and Small Cap

0.85

Correlation Coefficient

Regional Bank  Small Cap

Very poor diversification

The 3 months correlation between Regional and Small is 0.85. Overlapping area represents the amount of risk that can be diversified away by holding Regional Bank Fund and Small Cap Value in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Cap Value and Regional Bank 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 Regional Bank Fund 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 Regional Bank i.e., Regional Bank and Small Cap go up and down completely randomly.

Pair Corralation between Regional Bank and Small Cap

Assuming the 90 days horizon Regional Bank Fund is expected to under-perform the Small Cap. In addition to that, Regional Bank is 1.21 times more volatile than Small Cap Value. It trades about -0.2 of its total potential returns per unit of risk. Small Cap Value is currently generating about -0.18 per unit of volatility. If you would invest  1,890  in Small Cap Value on September 21, 2024 and sell it today you would lose (91.00) from holding Small Cap Value or give up 4.81% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	95.45%
Values	Daily Returns

Regional Bank Fund  vs.  Small Cap Value

Regional Bank

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Regional Bank Fund are ranked lower than 4 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak technical and fundamental indicators, Regional Bank may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Small Cap Value

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Small Cap Value 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.

Pair Trading with Regional Bank and Small Cap

The main advantage of trading using opposite Regional Bank and Small Cap positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Regional Bank 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 Regional Bank Fund and Small Cap Value 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 Share Portfolio module to track or share privately all of your investments from the convenience of any device.