Correlation Between Small Cap and Inflation Protected

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

Diversification Opportunities for Small Cap and Inflation Protected

0.12

Correlation Coefficient

Small Cap  Inflation Protected

Average diversification

The 3 months correlation between Small and Inflation is 0.12. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Stock and Inflation Protected Bond Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Inflation Protected 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 Inflation Protected. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Inflation Protected has no effect on the direction of Small Cap i.e., Small Cap and Inflation Protected go up and down completely randomly.

Pair Corralation between Small Cap and Inflation Protected

Assuming the 90 days horizon Small Cap Stock is expected to under-perform the Inflation Protected. In addition to that, Small Cap is 2.74 times more volatile than Inflation Protected Bond Fund. It trades about -0.11 of its total potential returns per unit of risk. Inflation Protected Bond Fund is currently generating about 0.0 per unit of volatility. If you would invest  1,030  in Inflation Protected Bond Fund on December 25, 2024 and sell it today you would earn a total of  0.00  from holding Inflation Protected Bond Fund or generate 0.0% return on investment over 90 days.

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

Small Cap Stock  vs.  Inflation Protected Bond Fund

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 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.

Inflation Protected

Risk-Adjusted Performance

Very Weak

Over the last 90 days Inflation Protected Bond Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, Inflation Protected 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 Inflation Protected

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

The idea behind Small Cap Stock and Inflation Protected Bond 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 Transaction History module to view history of all your transactions and understand their impact on performance.