Correlation Between Smallcap Growth and Diamond Hill

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

By analyzing existing cross correlation between Smallcap Growth Fund and Diamond Hill Small, you can compare the effects of market volatilities on Smallcap Growth and Diamond Hill 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 Smallcap Growth with a short position of Diamond Hill. Check out your portfolio center. Please also check ongoing floating volatility patterns of Smallcap Growth and Diamond Hill.

Diversification Opportunities for Smallcap Growth and Diamond Hill

0.99

Correlation Coefficient

Smallcap Growth  Diamond Hill

No risk reduction

The 3 months correlation between Smallcap and Diamond is 0.99. Overlapping area represents the amount of risk that can be diversified away by holding Smallcap Growth Fund and Diamond Hill Small in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Diamond Hill Small and Smallcap Growth 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 Smallcap Growth Fund are associated (or correlated) with Diamond Hill. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Diamond Hill Small has no effect on the direction of Smallcap Growth i.e., Smallcap Growth and Diamond Hill go up and down completely randomly.

Pair Corralation between Smallcap Growth and Diamond Hill

Assuming the 90 days horizon Smallcap Growth Fund is expected to under-perform the Diamond Hill. In addition to that, Smallcap Growth is 1.18 times more volatile than Diamond Hill Small. It trades about -0.08 of its total potential returns per unit of risk. Diamond Hill Small is currently generating about -0.07 per unit of volatility. If you would invest  2,958  in Diamond Hill Small on September 12, 2024 and sell it today you would lose (46.00) from holding Diamond Hill Small or give up 1.56% of portfolio value over 90 days.

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

Smallcap Growth Fund  vs.  Diamond Hill Small

Smallcap Growth

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Smallcap Growth Fund are ranked lower than 12 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly abnormal basic indicators, Smallcap Growth may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Diamond Hill Small

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Diamond Hill Small are ranked lower than 11 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak forward indicators, Diamond Hill may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Smallcap Growth and Diamond Hill

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

The idea behind Smallcap Growth Fund and Diamond Hill Small 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 Portfolio Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.