Correlation Between Principal Small and Principal Value

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

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

Diversification Opportunities for Principal Small and Principal Value

0.87

Correlation Coefficient

Principal Small  Principal Value

Very poor diversification

The 3 months correlation between Principal and Principal is 0.87. Overlapping area represents the amount of risk that can be diversified away by holding Principal Small Cap Multi Fact and Principal Value ETF in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Principal Value ETF and Principal Small 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 Principal Small Cap Multi Factor are associated (or correlated) with Principal Value. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Principal Value ETF has no effect on the direction of Principal Small i.e., Principal Small and Principal Value go up and down completely randomly.

Pair Corralation between Principal Small and Principal Value

Considering the 90-day investment horizon Principal Small Cap Multi Factor is expected to under-perform the Principal Value. In addition to that, Principal Small is 1.46 times more volatile than Principal Value ETF. It trades about -0.07 of its total potential returns per unit of risk. Principal Value ETF is currently generating about -0.03 per unit of volatility. If you would invest  4,949  in Principal Value ETF on December 30, 2024 and sell it today you would lose (99.00) from holding Principal Value ETF or give up 2.0% of portfolio value over 90 days.

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

Principal Small Cap Multi Fact  vs.  Principal Value ETF

Principal Small Cap

Risk-Adjusted Performance

Very Weak

Over the last 90 days Principal Small Cap Multi Factor has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound basic indicators, Principal Small is not utilizing all of its potentials. The current stock price tumult, may contribute to shorter-term losses for the shareholders.

Principal Value ETF

Risk-Adjusted Performance

Very Weak

Over the last 90 days Principal Value ETF has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong basic indicators, Principal Value is not utilizing all of its potentials. The newest stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Principal Small and Principal Value

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

The idea behind Principal Small Cap Multi Factor and Principal Value ETF 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 Watchlist Optimization module to optimize watchlists to build efficient portfolios or rebalance existing positions based on the mean-variance optimization algorithm.