Correlation Between Small Cap and Invesco Government

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

Diversification Opportunities for Small Cap and Invesco Government

-0.02

Correlation Coefficient

Small Cap  Invesco Government

Good diversification

The 3 months correlation between Small and Invesco is -0.02. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Stock and Invesco Government Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Invesco Government 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 Invesco Government. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Invesco Government has no effect on the direction of Small Cap i.e., Small Cap and Invesco Government go up and down completely randomly.

Pair Corralation between Small Cap and Invesco Government

Assuming the 90 days horizon Small Cap Stock is expected to generate 5.01 times more return on investment than Invesco Government. However, Small Cap is 5.01 times more volatile than Invesco Government Fund. It trades about 0.02 of its potential returns per unit of risk. Invesco Government Fund is currently generating about 0.08 per unit of risk. If you would invest  1,230  in Small Cap Stock on October 10, 2024 and sell it today you would earn a total of  105.00  from holding Small Cap Stock or generate 8.54% return on investment over 90 days.

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

Small Cap Stock  vs.  Invesco Government Fund

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.

Invesco Government

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Invesco Government Fund are ranked lower than 8 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Invesco Government is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Small Cap and Invesco Government

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

The idea behind Small Cap Stock and Invesco Government Fund 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 Stock Screener module to find equities using a custom stock filter or screen asymmetry in trading patterns, price, volume, or investment outlook..