Correlation Between Nasdaq-100(r) and Small-cap Value

Can any of the company-specific risk be diversified away by investing in both Nasdaq-100(r) and Small-cap Value 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 Nasdaq-100(r) and Small-cap Value into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Nasdaq 100 2x Strategy and Small Cap Value Fund, you can compare the effects of market volatilities on Nasdaq-100(r) and Small-cap Value 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 Nasdaq-100(r) with a short position of Small-cap Value. Check out your portfolio center. Please also check ongoing floating volatility patterns of Nasdaq-100(r) and Small-cap Value.

Diversification Opportunities for Nasdaq-100(r) and Small-cap Value

0.35

Correlation Coefficient

Nasdaq-100(r)  Small-cap Value

Weak diversification

The 3 months correlation between Nasdaq-100(r) and Small-cap is 0.35. Overlapping area represents the amount of risk that can be diversified away by holding Nasdaq 100 2x Strategy and Small Cap Value Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Cap Value and Nasdaq-100(r) 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 Nasdaq 100 2x Strategy are associated (or correlated) with Small-cap Value. 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 Value has no effect on the direction of Nasdaq-100(r) i.e., Nasdaq-100(r) and Small-cap Value go up and down completely randomly.

Pair Corralation between Nasdaq-100(r) and Small-cap Value

Assuming the 90 days horizon Nasdaq 100 2x Strategy is expected to generate 1.7 times more return on investment than Small-cap Value. However, Nasdaq-100(r) is 1.7 times more volatile than Small Cap Value Fund. It trades about 0.1 of its potential returns per unit of risk. Small Cap Value Fund is currently generating about 0.02 per unit of risk. If you would invest  20,985  in Nasdaq 100 2x Strategy on October 4, 2024 and sell it today you would earn a total of  34,072  from holding Nasdaq 100 2x Strategy or generate 162.36% return on investment over 90 days.

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

Nasdaq 100 2x Strategy  vs.  Small Cap Value Fund

Nasdaq 100 2x

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Nasdaq 100 2x Strategy are ranked lower than 2 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong essential indicators, Nasdaq-100(r) is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Small Cap Value

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Small Cap Value 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 Nasdaq-100(r) and Small-cap Value

The main advantage of trading using opposite Nasdaq-100(r) and Small-cap Value positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Nasdaq-100(r) position performs unexpectedly, Small-cap Value 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 Value will offset losses from the drop in Small-cap Value's long position.

The idea behind Nasdaq 100 2x Strategy and Small Cap Value 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 Portfolio Comparator module to compare the composition, asset allocations and performance of any two portfolios in your account.