Correlation Between Royce Small-cap and Royce Opportunity

Can any of the company-specific risk be diversified away by investing in both Royce Small-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 Small-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 Small Cap Value and Royce Opportunity Fund, you can compare the effects of market volatilities on Royce Small-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 Small-cap with a short position of Royce Opportunity. Check out your portfolio center. Please also check ongoing floating volatility patterns of Royce Small-cap and Royce Opportunity.

Diversification Opportunities for Royce Small-cap and Royce Opportunity

0.78

Correlation Coefficient

Royce Small-cap  Royce Opportunity

Poor diversification

The 3 months correlation between Royce and Royce is 0.78. Overlapping area represents the amount of risk that can be diversified away by holding Royce Small Cap Value 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 Small-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 Small Cap Value 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 Small-cap i.e., Royce Small-cap and Royce Opportunity go up and down completely randomly.

Pair Corralation between Royce Small-cap and Royce Opportunity

Assuming the 90 days horizon Royce Small-cap is expected to generate 1.18 times less return on investment than Royce Opportunity. But when comparing it to its historical volatility, Royce Small Cap Value is 1.12 times less risky than Royce Opportunity. It trades about 0.02 of its potential returns per unit of risk. Royce Opportunity Fund is currently generating about 0.02 of returns per unit of risk over similar time horizon. If you would invest  1,354  in Royce Opportunity Fund on December 2, 2024 and sell it today you would earn a total of  130.00  from holding Royce Opportunity Fund or generate 9.6% return on investment over 90 days.

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

Royce Small Cap Value  vs.  Royce Opportunity Fund

Royce Small Cap

Risk-Adjusted Performance

Very Weak

Over the last 90 days Royce Small Cap Value 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 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 Small-cap and Royce Opportunity

The main advantage of trading using opposite Royce Small-cap and Royce Opportunity positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Royce Small-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 Small Cap Value 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 Bond Analysis module to evaluate and analyze corporate bonds as a potential investment for your portfolios..