Correlation Between Inverse Government and Smallcap

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

By analyzing existing cross correlation between Inverse Government Long and Smallcap Sp 600, you can compare the effects of market volatilities on Inverse Government and Smallcap 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 Inverse Government with a short position of Smallcap. Check out your portfolio center. Please also check ongoing floating volatility patterns of Inverse Government and Smallcap.

Diversification Opportunities for Inverse Government and Smallcap

0.0

Correlation Coefficient

Inverse Government  Smallcap

Pay attention - limited upside

The 3 months correlation between Inverse and Smallcap is 0.0. Overlapping area represents the amount of risk that can be diversified away by holding Inverse Government Long and Smallcap Sp 600 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Smallcap Sp 600 and Inverse Government 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 Inverse Government Long are associated (or correlated) with Smallcap. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Smallcap Sp 600 has no effect on the direction of Inverse Government i.e., Inverse Government and Smallcap go up and down completely randomly.

Pair Corralation between Inverse Government and Smallcap

If you would invest (100.00) in Smallcap Sp 600 on December 22, 2024 and sell it today you would earn a total of  100.00  from holding Smallcap Sp 600 or generate -100.0% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Flat
Strength	Insignificant
Accuracy	0.0%
Values	Daily Returns

Inverse Government Long  vs.  Smallcap Sp 600

Inverse Government Long

Risk-Adjusted Performance

Very Weak

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

Smallcap Sp 600

Risk-Adjusted Performance

Very Weak

Over the last 90 days Smallcap Sp 600 has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, Smallcap is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Inverse Government and Smallcap

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

The idea behind Inverse Government Long and Smallcap Sp 600 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 Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.