Correlation Between Moderately Aggressive and Small Cap

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

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

Diversification Opportunities for Moderately Aggressive and Small Cap

0.87

Correlation Coefficient

Moderately Aggressive  Small Cap

Very poor diversification

The 3 months correlation between Moderately and Small is 0.87. Overlapping area represents the amount of risk that can be diversified away by holding Moderately Aggressive Balanced and Small Cap Special in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Cap Special and Moderately Aggressive 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 Moderately Aggressive Balanced 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 Special has no effect on the direction of Moderately Aggressive i.e., Moderately Aggressive and Small Cap go up and down completely randomly.

Pair Corralation between Moderately Aggressive and Small Cap

Assuming the 90 days horizon Moderately Aggressive Balanced is expected to generate 0.47 times more return on investment than Small Cap. However, Moderately Aggressive Balanced is 2.15 times less risky than Small Cap. It trades about -0.03 of its potential returns per unit of risk. Small Cap Special is currently generating about -0.16 per unit of risk. If you would invest  1,174  in Moderately Aggressive Balanced on December 30, 2024 and sell it today you would lose (18.00) from holding Moderately Aggressive Balanced or give up 1.53% of portfolio value over 90 days.

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

Moderately Aggressive Balanced  vs.  Small Cap Special

Moderately Aggressive

Risk-Adjusted Performance

Very Weak

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

Small Cap Special

Risk-Adjusted Performance

Very Weak

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

Pair Trading with Moderately Aggressive and Small Cap

The main advantage of trading using opposite Moderately Aggressive and Small Cap positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Moderately Aggressive 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 Moderately Aggressive Balanced and Small Cap Special 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.