Correlation Between Ultra Fund and Small Cap

Can any of the company-specific risk be diversified away by investing in both Ultra 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 Ultra 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 Ultra Fund C and Small Cap Growth, you can compare the effects of market volatilities on Ultra 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 Ultra Fund with a short position of Small Cap. Check out your portfolio center. Please also check ongoing floating volatility patterns of Ultra Fund and Small Cap.

Diversification Opportunities for Ultra Fund and Small Cap

0.87

Correlation Coefficient

Ultra Fund  Small Cap

Very poor diversification

The 3 months correlation between Ultra and Small is 0.87. Overlapping area represents the amount of risk that can be diversified away by holding Ultra Fund C and Small Cap Growth in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Cap Growth and Ultra 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 Ultra Fund C 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 Growth has no effect on the direction of Ultra Fund i.e., Ultra Fund and Small Cap go up and down completely randomly.

Pair Corralation between Ultra Fund and Small Cap

Assuming the 90 days horizon Ultra Fund is expected to generate 1.06 times less return on investment than Small Cap. But when comparing it to its historical volatility, Ultra Fund C is 1.06 times less risky than Small Cap. It trades about 0.2 of its potential returns per unit of risk. Small Cap Growth is currently generating about 0.2 of returns per unit of risk over similar time horizon. If you would invest  2,181  in Small Cap Growth on September 5, 2024 and sell it today you would earn a total of  306.00  from holding Small Cap Growth or generate 14.03% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	98.44%
Values	Daily Returns

Ultra Fund C  vs.  Small Cap Growth

Ultra Fund C

Risk-Adjusted Performance

15 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Ultra Fund C are ranked lower than 15 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak fundamental indicators, Ultra Fund may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Small Cap Growth

Risk-Adjusted Performance

15 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Small Cap Growth are ranked lower than 15 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Small Cap showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Ultra Fund and Small Cap

The main advantage of trading using opposite Ultra Fund and Small Cap positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Ultra 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 Ultra Fund C and Small Cap Growth 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 Portfolio Diagnostics module to use generated alerts and portfolio events aggregator to diagnose current holdings.