Correlation Between Small Cap and Stone Ridge

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

Diversification Opportunities for Small Cap and Stone Ridge

-0.17

Correlation Coefficient

Small Cap  Stone Ridge

Good diversification

The 3 months correlation between Small and Stone is -0.17. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Stock and Stone Ridge Diversified in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Stone Ridge Diversified 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 Stone Ridge. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Stone Ridge Diversified has no effect on the direction of Small Cap i.e., Small Cap and Stone Ridge go up and down completely randomly.

Pair Corralation between Small Cap and Stone Ridge

Assuming the 90 days horizon Small Cap Stock is expected to under-perform the Stone Ridge. In addition to that, Small Cap is 7.84 times more volatile than Stone Ridge Diversified. It trades about -0.35 of its total potential returns per unit of risk. Stone Ridge Diversified is currently generating about 0.29 per unit of volatility. If you would invest  1,055  in Stone Ridge Diversified on October 10, 2024 and sell it today you would earn a total of  13.00  from holding Stone Ridge Diversified or generate 1.23% return on investment over 90 days.

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

Small Cap Stock  vs.  Stone Ridge Diversified

Small Cap Stock

Risk-Adjusted Performance

0 of 100

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 fairly strong basic indicators, Small Cap is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Stone Ridge Diversified

Risk-Adjusted Performance

26 of 100

Strong

Compared to the overall equity markets, risk-adjusted returns on investments in Stone Ridge Diversified are ranked lower than 26 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Stone Ridge 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 Stone Ridge

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

The idea behind Small Cap Stock and Stone Ridge Diversified 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 Volatility Analysis module to get historical volatility and risk analysis based on latest market data.