Correlation Between Inverse High and Small Cap

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

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

Diversification Opportunities for Inverse High and Small Cap

-0.36

Correlation Coefficient

Inverse High  Small Cap

Very good diversification

The 3 months correlation between Inverse and Small is -0.36. Overlapping area represents the amount of risk that can be diversified away by holding Inverse High Yield and Small Cap Equity in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Cap Equity and Inverse High 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 High Yield 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 Equity has no effect on the direction of Inverse High i.e., Inverse High and Small Cap go up and down completely randomly.

Pair Corralation between Inverse High and Small Cap

Assuming the 90 days horizon Inverse High Yield is expected to under-perform the Small Cap. But the mutual fund apears to be less risky and, when comparing its historical volatility, Inverse High Yield is 2.91 times less risky than Small Cap. The mutual fund trades about -0.01 of its potential returns per unit of risk. The Small Cap Equity is currently generating about 0.03 of returns per unit of risk over similar time horizon. If you would invest  1,569  in Small Cap Equity on October 10, 2024 and sell it today you would earn a total of  226.00  from holding Small Cap Equity or generate 14.4% return on investment over 90 days.

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

Inverse High Yield  vs.  Small Cap Equity

Inverse High Yield

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Inverse High Yield are ranked lower than 5 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong technical indicators, Inverse High is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Small Cap Equity

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Small Cap Equity has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, Small Cap 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 High and Small Cap

The main advantage of trading using opposite Inverse High and Small Cap positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Inverse High 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 Inverse High Yield and Small Cap Equity 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 Competition Analyzer module to analyze and compare many basic indicators for a group of related or unrelated entities.