Correlation Between Smallcap Growth and Diversified International

Can any of the company-specific risk be diversified away by investing in both Smallcap Growth and Diversified International 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 Diversified International 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 Diversified International Fund, you can compare the effects of market volatilities on Smallcap Growth and Diversified International 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 Diversified International. Check out your portfolio center. Please also check ongoing floating volatility patterns of Smallcap Growth and Diversified International.

Diversification Opportunities for Smallcap Growth and Diversified International

-0.45

Correlation Coefficient

Smallcap Growth  Diversified International

Very good diversification

The 3 months correlation between Smallcap and Diversified is -0.45. Overlapping area represents the amount of risk that can be diversified away by holding Smallcap Growth Fund and Diversified International Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Diversified International 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 Diversified International. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Diversified International has no effect on the direction of Smallcap Growth i.e., Smallcap Growth and Diversified International go up and down completely randomly.

Pair Corralation between Smallcap Growth and Diversified International

Assuming the 90 days horizon Smallcap Growth Fund is expected to generate 1.37 times more return on investment than Diversified International. However, Smallcap Growth is 1.37 times more volatile than Diversified International Fund. It trades about 0.16 of its potential returns per unit of risk. Diversified International Fund is currently generating about -0.02 per unit of risk. If you would invest  1,113  in Smallcap Growth Fund on September 12, 2024 and sell it today you would earn a total of  126.00  from holding Smallcap Growth Fund or generate 11.32% return on investment over 90 days.

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

Smallcap Growth Fund  vs.  Diversified International Fund

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 weak primary indicators, Smallcap Growth may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Diversified International

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with Smallcap Growth and Diversified International

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

The idea behind Smallcap Growth Fund and Diversified International 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 Pair Correlation module to compare performance and examine fundamental relationship between any two equity instruments.