Correlation Between Small Cap and Ab Discovery

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

Diversification Opportunities for Small Cap and Ab Discovery

0.94

Correlation Coefficient

Small Cap  Ab Discovery

Almost no diversification

The 3 months correlation between Small and ABASX is 0.94. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Core and Ab Discovery Value in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Ab Discovery Value 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 Ab Discovery. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Ab Discovery Value has no effect on the direction of Small Cap i.e., Small Cap and Ab Discovery go up and down completely randomly.

Pair Corralation between Small Cap and Ab Discovery

Assuming the 90 days horizon Small Cap Core is expected to generate 1.03 times more return on investment than Ab Discovery. However, Small Cap is 1.03 times more volatile than Ab Discovery Value. It trades about 0.03 of its potential returns per unit of risk. Ab Discovery Value is currently generating about 0.01 per unit of risk. If you would invest  1,042  in Small Cap Core on September 21, 2024 and sell it today you would earn a total of  157.00  from holding Small Cap Core or generate 15.07% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Strong
Accuracy	99.8%
Values	Daily Returns

Small Cap Core  vs.  Ab Discovery Value

Small Cap Core

Risk-Adjusted Performance

0 of 100

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 weak performance in the last few months, the Fund's basic indicators remain fairly strong which may send shares a bit higher in January 2025. The current disturbance may also be a sign of long term up-swing for the fund investors.

Ab Discovery Value

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Ab Discovery Value 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 Small Cap and Ab Discovery

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

The idea behind Small Cap Core and Ab Discovery Value 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 Idea Breakdown module to analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes.