Correlation Between Small Cap and Horizon Active

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

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

Diversification Opportunities for Small Cap and Horizon Active

0.8

Correlation Coefficient

Small Cap  Horizon Active

Very poor diversification

The 3 months correlation between Small and Horizon is 0.8. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Stock and Horizon Active Asset in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Horizon Active Asset and Small Cap 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 Small Cap Stock are associated (or correlated) with Horizon Active. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Horizon Active Asset has no effect on the direction of Small Cap i.e., Small Cap and Horizon Active go up and down completely randomly.

Pair Corralation between Small Cap and Horizon Active

Assuming the 90 days horizon Small Cap Stock is expected to generate 0.45 times more return on investment than Horizon Active. However, Small Cap Stock is 2.2 times less risky than Horizon Active. It trades about -0.37 of its potential returns per unit of risk. Horizon Active Asset is currently generating about -0.26 per unit of risk. If you would invest  1,510  in Small Cap Stock on October 7, 2024 and sell it today you would lose (175.00) from holding Small Cap Stock or give up 11.59% of portfolio value over 90 days.

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

Small Cap Stock  vs.  Horizon Active Asset

Small Cap Stock

Risk-Adjusted Performance

0 of 100

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 fairly strong basic indicators, Small Cap is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Horizon Active Asset

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with Small Cap and Horizon Active

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

The idea behind Small Cap Stock and Horizon Active Asset 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 Piotroski F Score module to get Piotroski F Score based on the binary analysis strategy of nine different fundamentals.