Correlation Between Small-cap Value and Ultrasmall Cap

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

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

Diversification Opportunities for Small-cap Value and Ultrasmall Cap

0.91

Correlation Coefficient

Small-cap Value  Ultrasmall Cap

Almost no diversification

The 3 months correlation between Small-cap and Ultrasmall is 0.91. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Value Series and Ultrasmall Cap Profund Ultrasm in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Ultrasmall Cap Profund and Small-cap Value 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 Series are associated (or correlated) with Ultrasmall Cap. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Ultrasmall Cap Profund has no effect on the direction of Small-cap Value i.e., Small-cap Value and Ultrasmall Cap go up and down completely randomly.

Pair Corralation between Small-cap Value and Ultrasmall Cap

Assuming the 90 days horizon Small Cap Value Series is expected to under-perform the Ultrasmall Cap. But the mutual fund apears to be less risky and, when comparing its historical volatility, Small Cap Value Series is 1.16 times less risky than Ultrasmall Cap. The mutual fund trades about -0.32 of its potential returns per unit of risk. The Ultrasmall Cap Profund Ultrasmall Cap is currently generating about -0.24 of returns per unit of risk over similar time horizon. If you would invest  7,845  in Ultrasmall Cap Profund Ultrasmall Cap on October 6, 2024 and sell it today you would lose (937.00) from holding Ultrasmall Cap Profund Ultrasmall Cap or give up 11.94% of portfolio value over 90 days.

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

Small Cap Value Series  vs.  Ultrasmall Cap Profund Ultrasm

Small Cap Value

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Small Cap Value Series has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, Small-cap Value is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Ultrasmall Cap Profund

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Ultrasmall Cap Profund Ultrasmall Cap are ranked lower than 2 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong forward indicators, Ultrasmall 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 Small-cap Value and Ultrasmall Cap

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

The idea behind Small Cap Value Series and Ultrasmall Cap Profund Ultrasmall Cap 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 ETFs module to find actively traded Exchange Traded Funds (ETF) from around the world.