Correlation Between Royce Micro-cap and Royce Opportunity

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

By analyzing existing cross correlation between Royce Micro Cap Fund and Royce Opportunity Fund, you can compare the effects of market volatilities on Royce Micro-cap and Royce Opportunity 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 Royce Micro-cap with a short position of Royce Opportunity. Check out your portfolio center. Please also check ongoing floating volatility patterns of Royce Micro-cap and Royce Opportunity.

Diversification Opportunities for Royce Micro-cap and Royce Opportunity

0.8

Correlation Coefficient

Royce Micro-cap  Royce Opportunity

Very poor diversification

The 3 months correlation between Royce and Royce is 0.8. Overlapping area represents the amount of risk that can be diversified away by holding Royce Micro Cap Fund and Royce Opportunity Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Royce Opportunity and Royce Micro-cap 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 Royce Micro Cap Fund are associated (or correlated) with Royce Opportunity. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Royce Opportunity has no effect on the direction of Royce Micro-cap i.e., Royce Micro-cap and Royce Opportunity go up and down completely randomly.

Pair Corralation between Royce Micro-cap and Royce Opportunity

Assuming the 90 days horizon Royce Micro Cap Fund is expected to under-perform the Royce Opportunity. In addition to that, Royce Micro-cap is 1.22 times more volatile than Royce Opportunity Fund. It trades about -0.19 of its total potential returns per unit of risk. Royce Opportunity Fund is currently generating about -0.18 per unit of volatility. If you would invest  1,780  in Royce Opportunity Fund on December 2, 2024 and sell it today you would lose (296.00) from holding Royce Opportunity Fund or give up 16.63% of portfolio value over 90 days.

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

Royce Micro Cap Fund  vs.  Royce Opportunity Fund

Royce Micro Cap

Risk-Adjusted Performance

Very Weak

Over the last 90 days Royce Micro Cap Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of weak performance in the last few months, the Fund's technical and fundamental indicators remain fairly strong which may send shares a bit higher in April 2025. The current disturbance may also be a sign of long term up-swing for the fund investors.

Royce Opportunity

Risk-Adjusted Performance

Very Weak

Over the last 90 days Royce Opportunity Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of weak performance in the last few months, the Fund's basic indicators remain fairly strong which may send shares a bit higher in April 2025. The current disturbance may also be a sign of long term up-swing for the fund investors.

Pair Trading with Royce Micro-cap and Royce Opportunity

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

The idea behind Royce Micro Cap Fund and Royce Opportunity 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 Portfolio Suggestion module to get suggestions outside of your existing asset allocation including your own model portfolios.