Correlation Between Philip Morris and Small Cap

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

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

Diversification Opportunities for Philip Morris and Small Cap

0.75

Correlation Coefficient

Philip Morris  Small Cap

Poor diversification

The 3 months correlation between Philip and Small is 0.75. Overlapping area represents the amount of risk that can be diversified away by holding Philip Morris International and Small Cap Premium in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Cap Premium and Philip Morris 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 Philip Morris International 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 Premium has no effect on the direction of Philip Morris i.e., Philip Morris and Small Cap go up and down completely randomly.

Pair Corralation between Philip Morris and Small Cap

Allowing for the 90-day total investment horizon Philip Morris International is expected to generate 5.14 times more return on investment than Small Cap. However, Philip Morris is 5.14 times more volatile than Small Cap Premium. It trades about 0.22 of its potential returns per unit of risk. Small Cap Premium is currently generating about 0.09 per unit of risk. If you would invest  12,050  in Philip Morris International on December 24, 2024 and sell it today you would earn a total of  3,098  from holding Philip Morris International or generate 25.71% return on investment over 90 days.

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

Philip Morris International  vs.  Small Cap Premium

Philip Morris Intern

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Philip Morris International are ranked lower than 16 (%) of all global equities and portfolios over the last 90 days. In spite of very inconsistent primary indicators, Philip Morris displayed solid returns over the last few months and may actually be approaching a breakup point.

Small Cap Premium

Risk-Adjusted Performance

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Small Cap Premium are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound fundamental indicators, Small Cap is not utilizing all of its potentials. The current stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with Philip Morris and Small Cap

The main advantage of trading using opposite Philip Morris and Small Cap positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Philip Morris 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 Philip Morris International and Small Cap Premium 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 Competition Analyzer module to analyze and compare many basic indicators for a group of related or unrelated entities.