Correlation Between Small Capitalization and Health Biotchnology

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

Diversification Opportunities for Small Capitalization and Health Biotchnology

-0.31

Correlation Coefficient

Small Capitalization  Health Biotchnology

Very good diversification

The 3 months correlation between Small and Health is -0.31. Overlapping area represents the amount of risk that can be diversified away by holding Small Capitalization Portfolio and Health Biotchnology Portfolio in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Health Biotchnology 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 Health Biotchnology. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Health Biotchnology has no effect on the direction of Small Capitalization i.e., Small Capitalization and Health Biotchnology go up and down completely randomly.

Pair Corralation between Small Capitalization and Health Biotchnology

Assuming the 90 days horizon Small Capitalization Portfolio is expected to generate 1.59 times more return on investment than Health Biotchnology. However, Small Capitalization is 1.59 times more volatile than Health Biotchnology Portfolio. It trades about 0.15 of its potential returns per unit of risk. Health Biotchnology Portfolio is currently generating about -0.1 per unit of risk. If you would invest  648.00  in Small Capitalization Portfolio on September 1, 2024 and sell it today you would earn a total of  77.00  from holding Small Capitalization Portfolio or generate 11.88% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	98.44%
Values	Daily Returns

Small Capitalization Portfolio  vs.  Health Biotchnology Portfolio

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 basic indicators, Small Capitalization may actually be approaching a critical reversion point that can send shares even higher in December 2024.

Health Biotchnology

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Health Biotchnology Portfolio has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong forward indicators, Health Biotchnology 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 Health Biotchnology

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

The idea behind Small Capitalization Portfolio and Health Biotchnology 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.

Check out your portfolio center.

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 Pair Correlation module to compare performance and examine fundamental relationship between any two equity instruments.