Correlation Between Small Cap and Franklin Federal

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

Diversification Opportunities for Small Cap and Franklin Federal

0.69

Correlation Coefficient

Small Cap  Franklin Federal

Poor diversification

The 3 months correlation between Small and Franklin is 0.69. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Stock and Franklin Federal Tax Free in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Franklin Federal Tax 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 Franklin Federal. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Franklin Federal Tax has no effect on the direction of Small Cap i.e., Small Cap and Franklin Federal go up and down completely randomly.

Pair Corralation between Small Cap and Franklin Federal

Assuming the 90 days horizon Small Cap Stock is expected to under-perform the Franklin Federal. In addition to that, Small Cap is 3.87 times more volatile than Franklin Federal Tax Free. It trades about -0.28 of its total potential returns per unit of risk. Franklin Federal Tax Free is currently generating about 0.22 per unit of volatility. If you would invest  1,078  in Franklin Federal Tax Free on November 29, 2024 and sell it today you would earn a total of  12.00  from holding Franklin Federal Tax Free or generate 1.11% 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.  Franklin Federal Tax Free

Small Cap Stock

Risk-Adjusted Performance

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 weak performance in the last few months, the Fund's basic indicators remain fairly strong which may send shares a bit higher in March 2025. The current disturbance may also be a sign of long term up-swing for the fund investors.

Franklin Federal Tax

Risk-Adjusted Performance

Very Weak

Over the last 90 days Franklin Federal Tax Free has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, Franklin Federal 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 Franklin Federal

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

The idea behind Small Cap Stock and Franklin Federal Tax Free 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 Bonds Directory module to find actively traded corporate debentures issued by US companies.