Correlation Between Royce Premier and Royce Micro

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

By analyzing existing cross correlation between Royce Premier Fund and Royce Micro Cap Fund, you can compare the effects of market volatilities on Royce Premier and Royce Micro 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 Premier with a short position of Royce Micro. Check out your portfolio center. Please also check ongoing floating volatility patterns of Royce Premier and Royce Micro.

Diversification Opportunities for Royce Premier and Royce Micro

0.93

Correlation Coefficient

Royce Premier  Royce Micro

Almost no diversification

The 3 months correlation between Royce and Royce is 0.93. Overlapping area represents the amount of risk that can be diversified away by holding Royce Premier Fund and Royce Micro Cap Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Royce Micro Cap and Royce Premier 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 Premier Fund are associated (or correlated) with Royce Micro. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Royce Micro Cap has no effect on the direction of Royce Premier i.e., Royce Premier and Royce Micro go up and down completely randomly.

Pair Corralation between Royce Premier and Royce Micro

Assuming the 90 days horizon Royce Premier Fund is expected to generate 0.76 times more return on investment than Royce Micro. However, Royce Premier Fund is 1.31 times less risky than Royce Micro. It trades about -0.08 of its potential returns per unit of risk. Royce Micro Cap Fund is currently generating about -0.14 per unit of risk. If you would invest  1,109  in Royce Premier Fund on December 25, 2024 and sell it today you would lose (55.00) from holding Royce Premier Fund or give up 4.96% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Strong
Accuracy	98.33%
Values	Daily Returns

Royce Premier Fund  vs.  Royce Micro Cap Fund

Royce Premier

Risk-Adjusted Performance

Very Weak

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

Royce Micro Cap

Risk-Adjusted Performance

Very Weak

Over the last 90 days Royce Micro Cap Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of latest weak performance, the Fund's basic indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the fund investors.

Pair Trading with Royce Premier and Royce Micro

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

The idea behind Royce Premier Fund and Royce Micro Cap 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 Correlation Analysis module to reduce portfolio risk simply by holding instruments which are not perfectly correlated.