Correlation Between Small Cap and World Energy

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

Diversification Opportunities for Small Cap and World Energy

0.71

Correlation Coefficient

Small Cap  World Energy

Poor diversification

The 3 months correlation between Small and World is 0.71. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Stock and World Energy Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on World Energy 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 World Energy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of World Energy has no effect on the direction of Small Cap i.e., Small Cap and World Energy go up and down completely randomly.

Pair Corralation between Small Cap and World Energy

Assuming the 90 days horizon Small Cap is expected to generate 1.28 times less return on investment than World Energy. But when comparing it to its historical volatility, Small Cap Stock is 1.0 times less risky than World Energy. It trades about 0.02 of its potential returns per unit of risk. World Energy Fund is currently generating about 0.03 of returns per unit of risk over similar time horizon. If you would invest  1,277  in World Energy Fund on October 4, 2024 and sell it today you would earn a total of  171.00  from holding World Energy Fund or generate 13.39% return on investment over 90 days.

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

Small Cap Stock  vs.  World Energy 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 latest weak performance, the Fund's basic indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the fund investors.

World Energy

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in World Energy Fund are ranked lower than 2 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong technical and fundamental indicators, World Energy 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 World Energy

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

The idea behind Small Cap Stock and World Energy 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.

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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.