Correlation Between Small Cap and Investment

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

Diversification Opportunities for Small Cap and Investment

0.89

Correlation Coefficient

Small Cap  Investment

Very poor diversification

The 3 months correlation between Small and Investment is 0.89. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Stock and Investment Of America in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Investment Of America 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 Investment. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Investment Of America has no effect on the direction of Small Cap i.e., Small Cap and Investment go up and down completely randomly.

Pair Corralation between Small Cap and Investment

Assuming the 90 days horizon Small Cap is expected to generate 1.82 times less return on investment than Investment. In addition to that, Small Cap is 1.62 times more volatile than Investment Of America. It trades about 0.04 of its total potential returns per unit of risk. Investment Of America is currently generating about 0.13 per unit of volatility. If you would invest  4,568  in Investment Of America on September 12, 2024 and sell it today you would earn a total of  1,768  from holding Investment Of America or generate 38.7% return on investment over 90 days.

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

Small Cap Stock  vs.  Investment Of America

Small Cap Stock

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Small Cap Stock are ranked lower than 9 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Small Cap may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Investment Of America

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Investment Of America are ranked lower than 14 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak technical and fundamental indicators, Investment may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Small Cap and Investment

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

The idea behind Small Cap Stock and Investment Of America 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 Aroon Oscillator module to analyze current equity momentum using Aroon Oscillator and other momentum ratios.