Correlation Between Global Growth and Small Cap

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

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

Diversification Opportunities for Global Growth and Small Cap

0.3

Correlation Coefficient

Global Growth  Small Cap

Weak diversification

The 3 months correlation between Global and Small is 0.3. Overlapping area represents the amount of risk that can be diversified away by holding Global Growth Fund 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 Global Growth 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 Global Growth Fund 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 Global Growth i.e., Global Growth and Small Cap go up and down completely randomly.

Pair Corralation between Global Growth and Small Cap

Assuming the 90 days horizon Global Growth Fund is expected to under-perform the Small Cap. In addition to that, Global Growth is 2.7 times more volatile than Small Cap Growth. It trades about -0.22 of its total potential returns per unit of risk. Small Cap Growth is currently generating about -0.18 per unit of volatility. If you would invest  2,276  in Small Cap Growth on October 10, 2024 and sell it today you would lose (96.00) from holding Small Cap Growth or give up 4.22% of portfolio value over 90 days.

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

Global Growth Fund  vs.  Small Cap Growth

Global Growth

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Global Growth Fund 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 February 2025. The current disturbance may also be a sign of long term up-swing for the fund investors.

Small Cap Growth

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Small Cap Growth are ranked lower than 4 (%) 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.

Pair Trading with Global Growth and Small Cap

The main advantage of trading using opposite Global Growth and Small Cap positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Global Growth 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 Global Growth Fund 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.

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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 Odds Of Bankruptcy module to get analysis of equity chance of financial distress in the next 2 years.