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 |
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
Performance |
Timeline |
Small Cap Stock |
Short Term Government |
Small Cap and Short-term Government Volatility Contrast
Predicted Return Density |
Returns |
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.Small Cap vs. Intermediate Bond Fund | Small Cap vs. Doubleline Total Return | Small Cap vs. Intermediate Term Bond Fund | Small Cap vs. Versatile Bond Portfolio |
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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.
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