Correlation Between Adams Natural and Small Cap

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

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

Diversification Opportunities for Adams Natural and Small Cap

0.66

Correlation Coefficient

Adams Natural  Small Cap

Poor diversification

The 3 months correlation between Adams and Small is 0.66. Overlapping area represents the amount of risk that can be diversified away by holding Adams Natural Resources and Small Cap Stock in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Cap Stock and Adams Natural 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 Adams Natural Resources 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 Stock has no effect on the direction of Adams Natural i.e., Adams Natural and Small Cap go up and down completely randomly.

Pair Corralation between Adams Natural and Small Cap

Considering the 90-day investment horizon Adams Natural Resources is expected to generate 0.52 times more return on investment than Small Cap. However, Adams Natural Resources is 1.93 times less risky than Small Cap. It trades about -0.71 of its potential returns per unit of risk. Small Cap Stock is currently generating about -0.38 per unit of risk. If you would invest  2,389  in Adams Natural Resources on September 23, 2024 and sell it today you would lose (282.00) from holding Adams Natural Resources or give up 11.8% of portfolio value over 90 days.

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

Adams Natural Resources  vs.  Small Cap Stock

Adams Natural Resources

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Adams Natural Resources has generated negative risk-adjusted returns adding no value to fund investors. In spite of very healthy technical and fundamental indicators, Adams Natural is not utilizing all of its potentials. The current stock price disarray, may contribute to short-term losses for the investors.

Small Cap Stock

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Small Cap Stock 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.

Pair Trading with Adams Natural and Small Cap

The main advantage of trading using opposite Adams Natural and Small Cap positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Adams Natural 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 Adams Natural Resources and Small Cap Stock 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.

Check out your portfolio center.

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 Aroon Oscillator module to analyze current equity momentum using Aroon Oscillator and other momentum ratios.