Correlation Between Small Cap and Fabxx

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

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

Diversification Opportunities for Small Cap and Fabxx

-0.36

Correlation Coefficient

Small Cap  Fabxx

Very good diversification

The 3 months correlation between Small and Fabxx is -0.36. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Core and Fabxx in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Fabxx and Small Cap 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 Small Cap Core are associated (or correlated) with Fabxx. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Fabxx has no effect on the direction of Small Cap i.e., Small Cap and Fabxx go up and down completely randomly.

Pair Corralation between Small Cap and Fabxx

Assuming the 90 days horizon Small Cap Core is expected to generate 0.42 times more return on investment than Fabxx. However, Small Cap Core is 2.4 times less risky than Fabxx. It trades about 0.25 of its potential returns per unit of risk. Fabxx is currently generating about -0.06 per unit of risk. If you would invest  1,381  in Small Cap Core on September 4, 2024 and sell it today you would earn a total of  121.00  from holding Small Cap Core or generate 8.76% return on investment over 90 days.

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

Small Cap Core  vs.  Fabxx

Small Cap Core

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Small Cap Core are ranked lower than 11 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Small Cap may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Fabxx

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with Small Cap and Fabxx

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

The idea behind Small Cap Core and Fabxx 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.

Check out your portfolio center.

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 CEOs Directory module to screen CEOs from public companies around the world.