Correlation Between Small Capitalization and Moderately Aggressive

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

Diversification Opportunities for Small Capitalization and Moderately Aggressive

0.68

Correlation Coefficient

Small Capitalization  Moderately Aggressive

Poor diversification

The 3 months correlation between Small and Moderately is 0.68. Overlapping area represents the amount of risk that can be diversified away by holding Small Capitalization Portfolio and Moderately Aggressive Balanced in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Moderately Aggressive 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 Moderately Aggressive. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Moderately Aggressive has no effect on the direction of Small Capitalization i.e., Small Capitalization and Moderately Aggressive go up and down completely randomly.

Pair Corralation between Small Capitalization and Moderately Aggressive

Assuming the 90 days horizon Small Capitalization Portfolio is expected to under-perform the Moderately Aggressive. In addition to that, Small Capitalization is 13.0 times more volatile than Moderately Aggressive Balanced. It trades about -0.15 of its total potential returns per unit of risk. Moderately Aggressive Balanced is currently generating about -0.12 per unit of volatility. If you would invest  1,235  in Moderately Aggressive Balanced on December 1, 2024 and sell it today you would lose (61.00) from holding Moderately Aggressive Balanced or give up 4.94% of portfolio value over 90 days.

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

Small Capitalization Portfolio  vs.  Moderately Aggressive Balanced

Small Capitalization

Risk-Adjusted Performance

Very Weak

Over the last 90 days Small Capitalization Portfolio 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 fundamental 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.

Moderately Aggressive

Risk-Adjusted Performance

Very Weak

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

Pair Trading with Small Capitalization and Moderately Aggressive

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

The idea behind Small Capitalization Portfolio and Moderately Aggressive Balanced 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 Portfolio Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.