Correlation Between Thompson Largecap and Needham Small

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

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

Diversification Opportunities for Thompson Largecap and Needham Small

0.77

Correlation Coefficient

Thompson Largecap  Needham Small

Poor diversification

The 3 months correlation between Thompson and Needham is 0.77. Overlapping area represents the amount of risk that can be diversified away by holding Thompson Largecap Fund and Needham Small Cap in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Needham Small Cap and Thompson Largecap 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 Thompson Largecap Fund are associated (or correlated) with Needham Small. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Needham Small Cap has no effect on the direction of Thompson Largecap i.e., Thompson Largecap and Needham Small go up and down completely randomly.

Pair Corralation between Thompson Largecap and Needham Small

Assuming the 90 days horizon Thompson Largecap Fund is expected to generate 0.49 times more return on investment than Needham Small. However, Thompson Largecap Fund is 2.02 times less risky than Needham Small. It trades about -0.04 of its potential returns per unit of risk. Needham Small Cap is currently generating about -0.15 per unit of risk. If you would invest  9,972  in Thompson Largecap Fund on December 30, 2024 and sell it today you would lose (239.00) from holding Thompson Largecap Fund or give up 2.4% of portfolio value over 90 days.

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

Thompson Largecap Fund  vs.  Needham Small Cap

Thompson Largecap

Risk-Adjusted Performance

Very Weak

Over the last 90 days Thompson Largecap Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong technical and fundamental indicators, Thompson Largecap is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Needham Small Cap

Risk-Adjusted Performance

Very Weak

Over the last 90 days Needham Small Cap 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 technical and fundamental 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 Thompson Largecap and Needham Small

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

The idea behind Thompson Largecap Fund and Needham Small 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 Risk-Return Analysis module to view associations between returns expected from investment and the risk you assume.