Correlation Between Small Capitalization and Technology Communications

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

Diversification Opportunities for Small Capitalization and Technology Communications

0.88

Correlation Coefficient

Small Capitalization  Technology Communications

Very poor diversification

The 3 months correlation between Small and Technology is 0.88. Overlapping area represents the amount of risk that can be diversified away by holding Small Capitalization Portfolio and Technology Munications Portfol in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Technology Communications 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 Technology Communications. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Technology Communications has no effect on the direction of Small Capitalization i.e., Small Capitalization and Technology Communications go up and down completely randomly.

Pair Corralation between Small Capitalization and Technology Communications

Assuming the 90 days horizon Small Capitalization Portfolio is expected to under-perform the Technology Communications. In addition to that, Small Capitalization is 1.02 times more volatile than Technology Munications Portfolio. It trades about -0.23 of its total potential returns per unit of risk. Technology Munications Portfolio is currently generating about -0.13 per unit of volatility. If you would invest  2,955  in Technology Munications Portfolio on December 1, 2024 and sell it today you would lose (393.00) from holding Technology Munications Portfolio or give up 13.3% of portfolio value over 90 days.

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

Small Capitalization Portfolio  vs.  Technology Munications Portfol

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 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.

Technology Communications

Risk-Adjusted Performance

Very Weak

Over the last 90 days Technology Munications 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 forward 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 Small Capitalization and Technology Communications

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

The idea behind Small Capitalization Portfolio and Technology Munications Portfolio 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 Alpha Finder module to use alpha and beta coefficients to find investment opportunities after accounting for the risk.