Correlation Between Tax-managed and Small-cap Value

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

By analyzing existing cross correlation between Tax Managed Mid Small and Small Cap Value Series, you can compare the effects of market volatilities on Tax-managed and Small-cap 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 Tax-managed with a short position of Small-cap Value. Check out your portfolio center. Please also check ongoing floating volatility patterns of Tax-managed and Small-cap Value.

Diversification Opportunities for Tax-managed and Small-cap Value

0.96

Correlation Coefficient

Tax-managed  Small-cap Value

Almost no diversification

The 3 months correlation between Tax-managed and Small-cap is 0.96. Overlapping area represents the amount of risk that can be diversified away by holding Tax Managed Mid Small and Small Cap Value Series in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Cap Value and Tax-managed 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 Tax Managed Mid Small are associated (or correlated) with Small-cap Value. 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 Value has no effect on the direction of Tax-managed i.e., Tax-managed and Small-cap Value go up and down completely randomly.

Pair Corralation between Tax-managed and Small-cap Value

Assuming the 90 days horizon Tax Managed Mid Small is expected to generate 0.55 times more return on investment than Small-cap Value. However, Tax Managed Mid Small is 1.8 times less risky than Small-cap Value. It trades about -0.36 of its potential returns per unit of risk. Small Cap Value Series is currently generating about -0.33 per unit of risk. If you would invest  4,549  in Tax Managed Mid Small on October 4, 2024 and sell it today you would lose (393.00) from holding Tax Managed Mid Small or give up 8.64% of portfolio value over 90 days.

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

Tax Managed Mid Small  vs.  Small Cap Value Series

Tax Managed Mid

Risk-Adjusted Performance

0 of 100

Very Weak

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

Small Cap Value

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with Tax-managed and Small-cap Value

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

The idea behind Tax Managed Mid Small and Small Cap Value Series 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 Investing Opportunities module to build portfolios using our predefined set of ideas and optimize them against your investing preferences.