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 I and Small Cap Dividend, 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

0.77

Correlation Coefficient

Ultra Fund  Small Cap

Poor diversification

The 3 months correlation between Ultra and Small is 0.77. Overlapping area represents the amount of risk that can be diversified away by holding Ultra Fund I and Small Cap Dividend in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Cap Dividend 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 I 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 Dividend 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 I is expected to generate 1.38 times more return on investment than Small Cap. However, Ultra Fund is 1.38 times more volatile than Small Cap Dividend. It trades about -0.16 of its potential returns per unit of risk. Small Cap Dividend is currently generating about -0.34 per unit of risk. If you would invest  10,403  in Ultra Fund I on October 4, 2024 and sell it today you would lose (477.00) from holding Ultra Fund I or give up 4.59% of portfolio value over 90 days.

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

Ultra Fund I  vs.  Small Cap Dividend

Ultra Fund I

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Ultra Fund I are ranked lower than 3 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong forward indicators, Ultra Fund is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Small Cap Dividend

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Small Cap Dividend has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong forward-looking 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 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 I and Small Cap Dividend 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 Idea Breakdown module to analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes.