Correlation Between Small Cap and Inverse High

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

Diversification Opportunities for Small Cap and Inverse High

-0.02

Correlation Coefficient

Small Cap  Inverse High

Good diversification

The 3 months correlation between Small and Inverse is -0.02. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Stock and Inverse High Yield in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Inverse High Yield 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 Inverse High. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Inverse High Yield has no effect on the direction of Small Cap i.e., Small Cap and Inverse High go up and down completely randomly.

Pair Corralation between Small Cap and Inverse High

Assuming the 90 days horizon Small Cap Stock is expected to under-perform the Inverse High. In addition to that, Small Cap is 3.46 times more volatile than Inverse High Yield. It trades about -0.12 of its total potential returns per unit of risk. Inverse High Yield is currently generating about -0.04 per unit of volatility. If you would invest  5,004  in Inverse High Yield on December 21, 2024 and sell it today you would lose (36.00) from holding Inverse High Yield or give up 0.72% of portfolio value over 90 days.

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

Small Cap Stock  vs.  Inverse High Yield

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.

Inverse High Yield

Risk-Adjusted Performance

Very Weak

Over the last 90 days Inverse High Yield has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong technical indicators, Inverse High 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 Inverse High

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

The idea behind Small Cap Stock and Inverse High Yield 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 Correlation Analysis module to reduce portfolio risk simply by holding instruments which are not perfectly correlated.