Correlation Between Needham Small and Paradigm Micro-cap

Can any of the company-specific risk be diversified away by investing in both Needham Small and Paradigm Micro-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 Needham Small and Paradigm Micro-cap 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 Paradigm Micro Cap Fund, you can compare the effects of market volatilities on Needham Small and Paradigm Micro-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 Needham Small with a short position of Paradigm Micro-cap. Check out your portfolio center. Please also check ongoing floating volatility patterns of Needham Small and Paradigm Micro-cap.

Diversification Opportunities for Needham Small and Paradigm Micro-cap

0.74

Correlation Coefficient

Needham Small  Paradigm Micro-cap

Poor diversification

The 3 months correlation between Needham and Paradigm is 0.74. Overlapping area represents the amount of risk that can be diversified away by holding Needham Small Cap and Paradigm Micro Cap Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Paradigm Micro Cap 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 Paradigm Micro-cap. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Paradigm Micro Cap has no effect on the direction of Needham Small i.e., Needham Small and Paradigm Micro-cap go up and down completely randomly.

Pair Corralation between Needham Small and Paradigm Micro-cap

Assuming the 90 days horizon Needham Small Cap is expected to generate 0.98 times more return on investment than Paradigm Micro-cap. However, Needham Small Cap is 1.02 times less risky than Paradigm Micro-cap. It trades about -0.06 of its potential returns per unit of risk. Paradigm Micro Cap Fund is currently generating about -0.12 per unit of risk. If you would invest  1,896  in Needham Small Cap on November 29, 2024 and sell it today you would lose (119.00) from holding Needham Small Cap or give up 6.28% of portfolio value over 90 days.

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

Needham Small Cap  vs.  Paradigm Micro Cap Fund

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 fairly strong technical and fundamental indicators, Needham Small is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Paradigm Micro Cap

Risk-Adjusted Performance

Very Weak

Over the last 90 days Paradigm Micro Cap Fund 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 basic indicators remain fairly strong which may send shares a bit higher in March 2025. The current disturbance may also be a sign of long term up-swing for the fund investors.

Pair Trading with Needham Small and Paradigm Micro-cap

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

The idea behind Needham Small Cap and Paradigm Micro Cap 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 Balance Of Power module to check stock momentum by analyzing Balance Of Power indicator and other technical ratios.