Correlation Between Small Cap and Hennessy

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

By analyzing existing cross correlation between Small Cap Value and Hennessy Bp Energy, you can compare the effects of market volatilities on Small Cap and Hennessy 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 Hennessy. Check out your portfolio center. Please also check ongoing floating volatility patterns of Small Cap and Hennessy.

Diversification Opportunities for Small Cap and Hennessy

0.53

Correlation Coefficient

Small Cap  Hennessy

Very weak diversification

The 3 months correlation between Small and Hennessy is 0.53. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Value and Hennessy Bp Energy in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Hennessy Bp Energy 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 Value are associated (or correlated) with Hennessy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Hennessy Bp Energy has no effect on the direction of Small Cap i.e., Small Cap and Hennessy go up and down completely randomly.

Pair Corralation between Small Cap and Hennessy

Assuming the 90 days horizon Small Cap Value is expected to under-perform the Hennessy. In addition to that, Small Cap is 1.65 times more volatile than Hennessy Bp Energy. It trades about -0.39 of its total potential returns per unit of risk. Hennessy Bp Energy is currently generating about -0.02 per unit of volatility. If you would invest  2,756  in Hennessy Bp Energy on October 10, 2024 and sell it today you would lose (18.00) from holding Hennessy Bp Energy or give up 0.65% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	95.24%
Values	Daily Returns

Small Cap Value  vs.  Hennessy Bp Energy

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 latest weak performance, the Fund's basic indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the fund investors.

Hennessy Bp Energy

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Hennessy Bp Energy has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong technical and fundamental indicators, Hennessy 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 Hennessy

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

The idea behind Small Cap Value and Hennessy Bp Energy 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 Instant Ratings module to determine any equity ratings based on digital recommendations. Macroaxis instant equity ratings are based on combination of fundamental analysis and risk-adjusted market performance.