Correlation Between Balanced Fund and Small Cap

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

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

Diversification Opportunities for Balanced Fund and Small Cap

0.53

Correlation Coefficient

Balanced Fund  Small Cap

Very weak diversification

The 3 months correlation between Balanced and Small is 0.53. Overlapping area represents the amount of risk that can be diversified away by holding Balanced Fund Investor and Small Cap Stock in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Cap Stock and Balanced Fund 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 Balanced Fund Investor are associated (or correlated) with 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 Small Cap Stock has no effect on the direction of Balanced Fund i.e., Balanced Fund and Small Cap go up and down completely randomly.

Pair Corralation between Balanced Fund and Small Cap

Assuming the 90 days horizon Balanced Fund Investor is expected to generate 0.47 times more return on investment than Small Cap. However, Balanced Fund Investor is 2.13 times less risky than Small Cap. It trades about -0.12 of its potential returns per unit of risk. Small Cap Stock is currently generating about -0.28 per unit of risk. If you would invest  2,010  in Balanced Fund Investor on November 29, 2024 and sell it today you would lose (23.00) from holding Balanced Fund Investor or give up 1.14% of portfolio value over 90 days.

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

Balanced Fund Investor  vs.  Small Cap Stock

Balanced Fund Investor

Risk-Adjusted Performance

Very Weak

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

Small Cap Stock

Risk-Adjusted Performance

Very Weak

Over the last 90 days Small Cap Stock 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 basic indicators remain fairly strong which may send shares a bit higher in March 2025. The current disturbance may also be a sign of long term up-swing for the fund investors.

Pair Trading with Balanced Fund and Small Cap

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

The idea behind Balanced Fund Investor and Small Cap Stock 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 Correlation Analysis module to reduce portfolio risk simply by holding instruments which are not perfectly correlated.