Correlation Between Small Cap and OFS Credit

Can any of the company-specific risk be diversified away by investing in both Small Cap and OFS Credit 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 OFS Credit 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 OFS Credit, you can compare the effects of market volatilities on Small Cap and OFS Credit 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 OFS Credit. Check out your portfolio center. Please also check ongoing floating volatility patterns of Small Cap and OFS Credit.

Diversification Opportunities for Small Cap and OFS Credit

-0.45

Correlation Coefficient

Small Cap  OFS Credit

Very good diversification

The 3 months correlation between Small and OFS is -0.45. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Core and OFS Credit in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on OFS Credit 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 OFS Credit. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of OFS Credit has no effect on the direction of Small Cap i.e., Small Cap and OFS Credit go up and down completely randomly.

Pair Corralation between Small Cap and OFS Credit

Assuming the 90 days horizon Small Cap Core is expected to under-perform the OFS Credit. In addition to that, Small Cap is 2.91 times more volatile than OFS Credit. It trades about -0.1 of its total potential returns per unit of risk. OFS Credit is currently generating about 0.07 per unit of volatility. If you would invest  2,437  in OFS Credit on December 20, 2024 and sell it today you would earn a total of  41.00  from holding OFS Credit or generate 1.68% return on investment over 90 days.

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

Small Cap Core  vs.  OFS Credit

Small Cap Core

Risk-Adjusted Performance

Very Weak

Over the last 90 days Small Cap Core 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.

OFS Credit

Risk-Adjusted Performance

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in OFS Credit are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy forward indicators, OFS Credit is not utilizing all of its potentials. The recent stock price disarray, may contribute to short-term losses for the investors.

Pair Trading with Small Cap and OFS Credit

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

The idea behind Small Cap Core and OFS Credit 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 Odds Of Bankruptcy module to get analysis of equity chance of financial distress in the next 2 years.