Correlation Between Small Cap and Us Government

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

Diversification Opportunities for Small Cap and Us Government

-0.31

Correlation Coefficient

Small Cap  Us Government

Very good diversification

The 3 months correlation between Small and UGSDX is -0.31. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Stock and Us Government Securities in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Us Government Securities 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 Us Government. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Us Government Securities has no effect on the direction of Small Cap i.e., Small Cap and Us Government go up and down completely randomly.

Pair Corralation between Small Cap and Us Government

Assuming the 90 days horizon Small Cap Stock is expected to generate 8.53 times more return on investment than Us Government. However, Small Cap is 8.53 times more volatile than Us Government Securities. It trades about 0.13 of its potential returns per unit of risk. Us Government Securities is currently generating about 0.24 per unit of risk. If you would invest  1,338  in Small Cap Stock on October 25, 2024 and sell it today you would earn a total of  31.00  from holding Small Cap Stock or generate 2.32% 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.  Us Government Securities

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.

Us Government Securities

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Us Government Securities are ranked lower than 10 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong fundamental indicators, Us 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 Us Government

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

The idea behind Small Cap Stock and Us Government Securities 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 My Watchlist Analysis module to analyze my current watchlist and to refresh optimization strategy. Macroaxis watchlist is based on self-learning algorithm to remember stocks you like.