Correlation Between Needham Small and Applied Finance

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

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

Diversification Opportunities for Needham Small and Applied Finance

0.51

Correlation Coefficient

Needham Small  Applied Finance

Very weak diversification

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

Pair Corralation between Needham Small and Applied Finance

Assuming the 90 days horizon Needham Small Cap is expected to under-perform the Applied Finance. In addition to that, Needham Small is 2.22 times more volatile than Applied Finance Select. It trades about -0.15 of its total potential returns per unit of risk. Applied Finance Select is currently generating about 0.0 per unit of volatility. If you would invest  2,138  in Applied Finance Select on December 29, 2024 and sell it today you would lose (1.00) from holding Applied Finance Select or give up 0.05% of portfolio value over 90 days.

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

Needham Small Cap  vs.  Applied Finance Select

Needham Small Cap

Risk-Adjusted Performance

Very Weak

Over the last 90 days Needham Small Cap has generated negative risk-adjusted returns adding no value to fund investors. In spite of weak performance in the last few months, the Fund's technical and fundamental indicators remain fairly strong which may send shares a bit higher in April 2025. The current disturbance may also be a sign of long term up-swing for the fund investors.

Applied Finance Select

Risk-Adjusted Performance

Very Weak

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

Pair Trading with Needham Small and Applied Finance

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

The idea behind Needham Small Cap and Applied Finance Select 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 Transaction History module to view history of all your transactions and understand their impact on performance.