Correlation Between Small Capitalization and Vela Large

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

Diversification Opportunities for Small Capitalization and Vela Large

0.96

Correlation Coefficient

Small Capitalization  Vela Large

Almost no diversification

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

Pair Corralation between Small Capitalization and Vela Large

Assuming the 90 days horizon Small Capitalization Portfolio is expected to generate 2.77 times more return on investment than Vela Large. However, Small Capitalization is 2.77 times more volatile than Vela Large Cap. It trades about 0.08 of its potential returns per unit of risk. Vela Large Cap is currently generating about 0.15 per unit of risk. If you would invest  94.00  in Small Capitalization Portfolio on September 5, 2024 and sell it today you would earn a total of  27.00  from holding Small Capitalization Portfolio or generate 28.72% 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.  Vela Large Cap

Small Capitalization

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Small Capitalization Portfolio are ranked lower than 11 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak fundamental indicators, Small Capitalization showed solid returns over the last few months and may actually be approaching a breakup point.

Vela Large Cap

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Vela Large Cap are ranked lower than 13 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Vela Large 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 Vela Large

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

The idea behind Small Capitalization Portfolio and Vela Large Cap 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 Aroon Oscillator module to analyze current equity momentum using Aroon Oscillator and other momentum ratios.