Correlation Between Small Cap and Banks Ultrasector

Can any of the company-specific risk be diversified away by investing in both Small Cap and Banks Ultrasector 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 Cap and Banks Ultrasector into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Small Cap Value Profund and Banks Ultrasector Profund, you can compare the effects of market volatilities on Small Cap and Banks Ultrasector 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 Cap with a short position of Banks Ultrasector. Check out your portfolio center. Please also check ongoing floating volatility patterns of Small Cap and Banks Ultrasector.

Diversification Opportunities for Small Cap and Banks Ultrasector

0.96

Correlation Coefficient

Small Cap  Banks Ultrasector

Almost no diversification

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

Pair Corralation between Small Cap and Banks Ultrasector

Assuming the 90 days horizon Small Cap Value Profund is expected to generate 0.56 times more return on investment than Banks Ultrasector. However, Small Cap Value Profund is 1.79 times less risky than Banks Ultrasector. It trades about -0.37 of its potential returns per unit of risk. Banks Ultrasector Profund is currently generating about -0.53 per unit of risk. If you would invest  12,026  in Small Cap Value Profund on September 24, 2024 and sell it today you would lose (903.00) from holding Small Cap Value Profund or give up 7.51% of portfolio value over 90 days.

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

Small Cap Value Profund  vs.  Banks Ultrasector Profund

Small Cap Value

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Small Cap Value Profund are ranked lower than 1 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong forward indicators, Small Cap is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Banks Ultrasector Profund

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Banks Ultrasector Profund are ranked lower than 3 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak forward indicators, Banks Ultrasector may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Small Cap and Banks Ultrasector

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

The idea behind Small Cap Value Profund and Banks Ultrasector Profund 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 Volatility Analysis module to get historical volatility and risk analysis based on latest market data.