Correlation Between Short-term Government and Royce Small-cap

Can any of the company-specific risk be diversified away by investing in both Short-term Government and Royce Small-cap 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 Short-term Government and Royce Small-cap into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Short Term Government Fund and Royce Small Cap Value, you can compare the effects of market volatilities on Short-term Government and Royce Small-cap 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 Short-term Government with a short position of Royce Small-cap. Check out your portfolio center. Please also check ongoing floating volatility patterns of Short-term Government and Royce Small-cap.

Diversification Opportunities for Short-term Government and Royce Small-cap

-0.52

Correlation Coefficient

Short-term Government  Royce Small-cap

Excellent diversification

The 3 months correlation between Short-term and Royce is -0.52. Overlapping area represents the amount of risk that can be diversified away by holding Short Term Government Fund and Royce Small Cap Value in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Royce Small Cap and Short-term Government 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 Short Term Government Fund are associated (or correlated) with Royce Small-cap. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Royce Small Cap has no effect on the direction of Short-term Government i.e., Short-term Government and Royce Small-cap go up and down completely randomly.

Pair Corralation between Short-term Government and Royce Small-cap

Assuming the 90 days horizon Short Term Government Fund is expected to generate 0.11 times more return on investment than Royce Small-cap. However, Short Term Government Fund is 9.44 times less risky than Royce Small-cap. It trades about 0.16 of its potential returns per unit of risk. Royce Small Cap Value is currently generating about -0.36 per unit of risk. If you would invest  894.00  in Short Term Government Fund on December 2, 2024 and sell it today you would earn a total of  3.00  from holding Short Term Government Fund or generate 0.34% return on investment over 90 days.

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

Short Term Government Fund  vs.  Royce Small Cap Value

Short Term Government

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Short Term Government Fund are ranked lower than 9 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong fundamental indicators, Short-term Government is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Royce Small Cap

Risk-Adjusted Performance

Very Weak

Over the last 90 days Royce Small Cap Value 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 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 Short-term Government and Royce Small-cap

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

The idea behind Short Term Government Fund and Royce Small Cap Value 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 Portfolio Comparator module to compare the composition, asset allocations and performance of any two portfolios in your account.