Correlation Between Smallcap World and Professionally Managed

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

By analyzing existing cross correlation between Smallcap World Fund and Professionally Managed Portfolios, you can compare the effects of market volatilities on Smallcap World and Professionally Managed 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 Smallcap World with a short position of Professionally Managed. Check out your portfolio center. Please also check ongoing floating volatility patterns of Smallcap World and Professionally Managed.

Diversification Opportunities for Smallcap World and Professionally Managed

0.8

Correlation Coefficient

Smallcap World  Professionally Managed

Very poor diversification

The 3 months correlation between Smallcap and Professionally is 0.8. Overlapping area represents the amount of risk that can be diversified away by holding Smallcap World Fund and Professionally Managed Portfol in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Professionally Managed and Smallcap World 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 Smallcap World Fund are associated (or correlated) with Professionally Managed. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Professionally Managed has no effect on the direction of Smallcap World i.e., Smallcap World and Professionally Managed go up and down completely randomly.

Pair Corralation between Smallcap World and Professionally Managed

Assuming the 90 days horizon Smallcap World Fund is expected to generate 0.85 times more return on investment than Professionally Managed. However, Smallcap World Fund is 1.17 times less risky than Professionally Managed. It trades about -0.08 of its potential returns per unit of risk. Professionally Managed Portfolios is currently generating about -0.3 per unit of risk. If you would invest  6,707  in Smallcap World Fund on December 24, 2024 and sell it today you would lose (344.00) from holding Smallcap World Fund or give up 5.13% of portfolio value over 90 days.

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

Smallcap World Fund  vs.  Professionally Managed Portfol

Smallcap World

Risk-Adjusted Performance

Very Weak

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

Professionally Managed

Risk-Adjusted Performance

Very Weak

Over the last 90 days Professionally Managed Portfolios 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 Smallcap World and Professionally Managed

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

The idea behind Smallcap World Fund and Professionally Managed Portfolios 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 Cryptocurrency Center module to build and monitor diversified portfolio of extremely risky digital assets and cryptocurrency.