Correlation Between Small Cap and Short-term Government

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

Diversification Opportunities for Small Cap and Short-term Government

-0.82

Correlation Coefficient

Small Cap  Short-term Government

Pay attention - limited upside

The 3 months correlation between Small and SHORT-TERM is -0.82. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Stock and Short Term Government Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Short Term Government 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 Short-term Government. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Short Term Government has no effect on the direction of Small Cap i.e., Small Cap and Short-term Government go up and down completely randomly.

Pair Corralation between Small Cap and Short-term Government

Assuming the 90 days horizon Small Cap Stock is expected to under-perform the Short-term Government. In addition to that, Small Cap is 10.14 times more volatile than Short Term Government Fund. It trades about -0.1 of its total potential returns per unit of risk. Short Term Government Fund is currently generating about 0.18 per unit of volatility. If you would invest  901.00  in Short Term Government Fund on December 28, 2024 and sell it today you would earn a total of  11.00  from holding Short Term Government Fund or generate 1.22% return on investment over 90 days.

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

Small Cap Stock  vs.  Short Term Government 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.

Short Term Government

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Short Term Government Fund are ranked lower than 14 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Short-term Government 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 Short-term Government

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

The idea behind Small Cap Stock and Short Term Government 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.

Check out your portfolio center.

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 Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.