Correlation Between Small Capitalization and Aggressive Balanced

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

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

Diversification Opportunities for Small Capitalization and Aggressive Balanced

0.96

Correlation Coefficient

Small Capitalization  Aggressive Balanced

Almost no diversification

The 3 months correlation between Small and Aggressive is 0.96. Overlapping area represents the amount of risk that can be diversified away by holding Small Capitalization Portfolio and Aggressive Balanced Allocation in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Aggressive Balanced and Small Capitalization 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 Capitalization Portfolio are associated (or correlated) with Aggressive Balanced. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Aggressive Balanced has no effect on the direction of Small Capitalization i.e., Small Capitalization and Aggressive Balanced go up and down completely randomly.

Pair Corralation between Small Capitalization and Aggressive Balanced

Assuming the 90 days horizon Small Capitalization Portfolio is expected to generate 2.46 times more return on investment than Aggressive Balanced. However, Small Capitalization is 2.46 times more volatile than Aggressive Balanced Allocation. It trades about 0.14 of its potential returns per unit of risk. Aggressive Balanced Allocation is currently generating about 0.2 per unit of risk. If you would invest  108.00  in Small Capitalization Portfolio on September 3, 2024 and sell it today you would earn a total of  13.00  from holding Small Capitalization Portfolio or generate 12.04% return on investment over 90 days.

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

Small Capitalization Portfolio  vs.  Aggressive Balanced Allocation

Small Capitalization

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Small Capitalization Portfolio are ranked lower than 10 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak fundamental indicators, Small Capitalization may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Aggressive Balanced

Risk-Adjusted Performance

16 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Aggressive Balanced Allocation are ranked lower than 16 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak forward indicators, Aggressive Balanced may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Small Capitalization and Aggressive Balanced

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

The idea behind Small Capitalization Portfolio and Aggressive Balanced Allocation 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 Theme Ratings module to determine theme ratings based on digital equity recommendations. Macroaxis theme ratings are based on combination of fundamental analysis and risk-adjusted market performance.