Correlation Between MSCI ACWI and Small Cap

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

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

Diversification Opportunities for MSCI ACWI and Small Cap

0.36

Correlation Coefficient

MSCI ACWI  Small Cap

Weak diversification

The 3 months correlation between MSCI and Small is 0.36. Overlapping area represents the amount of risk that can be diversified away by holding MSCI ACWI exAUCONSUMER and Small Cap Core in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Cap Core and MSCI ACWI 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 MSCI ACWI exAUCONSUMER are associated (or correlated) with Small Cap. 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 Core has no effect on the direction of MSCI ACWI i.e., MSCI ACWI and Small Cap go up and down completely randomly.

Pair Corralation between MSCI ACWI and Small Cap

Assuming the 90 days horizon MSCI ACWI exAUCONSUMER is expected to generate 0.34 times more return on investment than Small Cap. However, MSCI ACWI exAUCONSUMER is 2.92 times less risky than Small Cap. It trades about 0.06 of its potential returns per unit of risk. Small Cap Core is currently generating about 0.02 per unit of risk. If you would invest  2,139  in MSCI ACWI exAUCONSUMER on September 21, 2024 and sell it today you would earn a total of  334.00  from holding MSCI ACWI exAUCONSUMER or generate 15.61% return on investment over 90 days.

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

MSCI ACWI exAUCONSUMER  vs.  Small Cap Core

MSCI ACWI exAUCONSUMER

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in MSCI ACWI exAUCONSUMER are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. Despite quite persistent basic indicators, MSCI ACWI is not utilizing all of its potentials. The latest stock price mess, may contribute to short-term losses for the institutional investors.

Small Cap Core

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Small Cap Core 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 January 2025. The current disturbance may also be a sign of long term up-swing for the fund investors.

Pair Trading with MSCI ACWI and Small Cap

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

The idea behind MSCI ACWI exAUCONSUMER and Small Cap Core 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 Alpha Finder module to use alpha and beta coefficients to find investment opportunities after accounting for the risk.