Correlation Between Stone Ridge and Small Cap

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

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

Diversification Opportunities for Stone Ridge and Small Cap

0.39

Correlation Coefficient

Stone Ridge  Small Cap

Weak diversification

The 3 months correlation between Stone and Small is 0.39. Overlapping area represents the amount of risk that can be diversified away by holding Stone Ridge Diversified and Small Cap Growth in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Cap Growth and Stone Ridge 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 Stone Ridge Diversified 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 Growth has no effect on the direction of Stone Ridge i.e., Stone Ridge and Small Cap go up and down completely randomly.

Pair Corralation between Stone Ridge and Small Cap

Assuming the 90 days horizon Stone Ridge Diversified is expected to generate 0.15 times more return on investment than Small Cap. However, Stone Ridge Diversified is 6.63 times less risky than Small Cap. It trades about 0.07 of its potential returns per unit of risk. Small Cap Growth is currently generating about -0.05 per unit of risk. If you would invest  1,057  in Stone Ridge Diversified on December 27, 2024 and sell it today you would earn a total of  8.00  from holding Stone Ridge Diversified or generate 0.76% return on investment over 90 days.

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

Stone Ridge Diversified  vs.  Small Cap Growth

Stone Ridge Diversified

Risk-Adjusted Performance

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Stone Ridge Diversified are ranked lower than 5 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong fundamental drivers, Stone Ridge is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Small Cap Growth

Risk-Adjusted Performance

Very Weak

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

Pair Trading with Stone Ridge and Small Cap

The main advantage of trading using opposite Stone Ridge and Small Cap positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Stone Ridge 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 Stone Ridge Diversified and Small Cap Growth 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 Equity Forecasting module to use basic forecasting models to generate price predictions and determine price momentum.