Correlation Between Small Cap and Tax-managed International

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

Diversification Opportunities for Small Cap and Tax-managed International

-0.51

Correlation Coefficient

Small Cap  Tax-managed International

Excellent diversification

The 3 months correlation between Small and Tax-managed is -0.51. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Stock and Tax Managed International Equi in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Tax-managed International 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 Tax-managed International. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Tax-managed International has no effect on the direction of Small Cap i.e., Small Cap and Tax-managed International go up and down completely randomly.

Pair Corralation between Small Cap and Tax-managed International

Assuming the 90 days horizon Small Cap Stock is expected to under-perform the Tax-managed International. In addition to that, Small Cap is 1.34 times more volatile than Tax Managed International Equity. It trades about -0.13 of its total potential returns per unit of risk. Tax Managed International Equity is currently generating about 0.16 per unit of volatility. If you would invest  1,132  in Tax Managed International Equity on December 21, 2024 and sell it today you would earn a total of  90.00  from holding Tax Managed International Equity or generate 7.95% return on investment over 90 days.

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

Small Cap Stock  vs.  Tax Managed International Equi

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.

Tax-managed International

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Tax Managed International Equity are ranked lower than 12 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Tax-managed International may actually be approaching a critical reversion point that can send shares even higher in April 2025.

Pair Trading with Small Cap and Tax-managed International

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

The idea behind Small Cap Stock and Tax Managed International Equity 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 Portfolio Comparator module to compare the composition, asset allocations and performance of any two portfolios in your account.