Correlation Between Small Capitalization and Financial Services

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

Diversification Opportunities for Small Capitalization and Financial Services

0.9

Correlation Coefficient

Small Capitalization  Financial Services

Almost no diversification

The 3 months correlation between Small and Financial is 0.9. Overlapping area represents the amount of risk that can be diversified away by holding Small Capitalization Portfolio and Financial Services Portfolio in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Financial Services 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 Financial Services. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Financial Services has no effect on the direction of Small Capitalization i.e., Small Capitalization and Financial Services go up and down completely randomly.

Pair Corralation between Small Capitalization and Financial Services

Assuming the 90 days horizon Small Capitalization is expected to generate 1.29 times less return on investment than Financial Services. In addition to that, Small Capitalization is 1.09 times more volatile than Financial Services Portfolio. It trades about 0.15 of its total potential returns per unit of risk. Financial Services Portfolio is currently generating about 0.21 per unit of volatility. If you would invest  1,003  in Financial Services Portfolio on August 31, 2024 and sell it today you would earn a total of  159.00  from holding Financial Services Portfolio or generate 15.85% 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.  Financial Services 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.

Financial Services

Risk-Adjusted Performance

16 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Financial Services Portfolio are ranked lower than 16 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Financial Services showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Small Capitalization and Financial Services

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

The idea behind Small Capitalization Portfolio and Financial Services 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 Balance Of Power module to check stock momentum by analyzing Balance Of Power indicator and other technical ratios.