Correlation Between Smallcap and State Farm

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Can any of the company-specific risk be diversified away by investing in both Smallcap and State Farm 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 and State Farm into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Smallcap Sp 600 and State Farm International, you can compare the effects of market volatilities on Smallcap and State Farm 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 with a short position of State Farm. Check out your portfolio center. Please also check ongoing floating volatility patterns of Smallcap and State Farm.

Diversification Opportunities for Smallcap and State Farm

-0.43
  Correlation Coefficient

Very good diversification

The 3 months correlation between Smallcap and State is -0.43. Overlapping area represents the amount of risk that can be diversified away by holding Smallcap Sp 600 and State Farm International in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on State Farm International and Smallcap 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 Sp 600 are associated (or correlated) with State Farm. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of State Farm International has no effect on the direction of Smallcap i.e., Smallcap and State Farm go up and down completely randomly.

Pair Corralation between Smallcap and State Farm

Assuming the 90 days horizon Smallcap Sp 600 is expected to generate 4.14 times more return on investment than State Farm. However, Smallcap is 4.14 times more volatile than State Farm International. It trades about 0.13 of its potential returns per unit of risk. State Farm International is currently generating about -0.1 per unit of risk. If you would invest  2,707  in Smallcap Sp 600 on September 17, 2024 and sell it today you would earn a total of  228.00  from holding Smallcap Sp 600 or generate 8.42% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Against 
StrengthVery Weak
Accuracy79.69%
ValuesDaily Returns

Smallcap Sp 600  vs.  State Farm International

 Performance 
       Timeline  
Smallcap Sp 600 

Risk-Adjusted Performance

0 of 100

 
Weak
 
Strong
OK
Over the last 90 days Smallcap Sp 600 has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly weak basic indicators, Smallcap may actually be approaching a critical reversion point that can send shares even higher in January 2025.
State Farm International 

Risk-Adjusted Performance

0 of 100

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

Smallcap and State Farm Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Smallcap and State Farm

The main advantage of trading using opposite Smallcap and State Farm positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Smallcap position performs unexpectedly, State Farm 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 State Farm will offset losses from the drop in State Farm's long position.
The idea behind Smallcap Sp 600 and State Farm International 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 Comparator module to compare the composition, asset allocations and performance of any two portfolios in your account.

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