Correlation Between Small Cap and Income Stock

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

Diversification Opportunities for Small Cap and Income Stock

0.87

Correlation Coefficient

Small Cap  Income Stock

Very poor diversification

The 3 months correlation between Small and Income is 0.87. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Stock and Income Stock Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Income Stock 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 Income Stock. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Income Stock has no effect on the direction of Small Cap i.e., Small Cap and Income Stock go up and down completely randomly.

Pair Corralation between Small Cap and Income Stock

Assuming the 90 days horizon Small Cap Stock is expected to under-perform the Income Stock. In addition to that, Small Cap is 1.94 times more volatile than Income Stock Fund. It trades about -0.31 of its total potential returns per unit of risk. Income Stock Fund is currently generating about 0.07 per unit of volatility. If you would invest  1,823  in Income Stock Fund on December 5, 2024 and sell it today you would earn a total of  14.00  from holding Income Stock Fund or generate 0.77% return on investment over 90 days.

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

Small Cap Stock  vs.  Income Stock 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 weak performance in the last few months, the Fund's basic indicators remain fairly strong which may send shares a bit higher in April 2025. The current disturbance may also be a sign of long term up-swing for the fund investors.

Income Stock

Risk-Adjusted Performance

Very Weak

Over the last 90 days Income Stock Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of weak performance in the last few months, the Fund's basic indicators remain fairly strong which may send shares a bit higher in April 2025. The current disturbance may also be a sign of long term up-swing for the fund investors.

Pair Trading with Small Cap and Income Stock

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

The idea behind Small Cap Stock and Income Stock 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.

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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 Theme Ratings module to determine theme ratings based on digital equity recommendations. Macroaxis theme ratings are based on combination of fundamental analysis and risk-adjusted market performance.