Correlation Between California Bond and Smallcap World

Can any of the company-specific risk be diversified away by investing in both California Bond and Smallcap World 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 California Bond and Smallcap World into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between California Bond Fund and Smallcap World Fund, you can compare the effects of market volatilities on California Bond and Smallcap World 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 California Bond with a short position of Smallcap World. Check out your portfolio center. Please also check ongoing floating volatility patterns of California Bond and Smallcap World.

Diversification Opportunities for California Bond and Smallcap World

0.8

Correlation Coefficient

California Bond  Smallcap World

Very poor diversification

The 3 months correlation between California and Smallcap is 0.8. Overlapping area represents the amount of risk that can be diversified away by holding California Bond Fund and Smallcap World Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Smallcap World and California Bond 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 California Bond Fund are associated (or correlated) with Smallcap World. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Smallcap World has no effect on the direction of California Bond i.e., California Bond and Smallcap World go up and down completely randomly.

Pair Corralation between California Bond and Smallcap World

Assuming the 90 days horizon California Bond Fund is expected to under-perform the Smallcap World. But the mutual fund apears to be less risky and, when comparing its historical volatility, California Bond Fund is 2.73 times less risky than Smallcap World. The mutual fund trades about -0.04 of its potential returns per unit of risk. The Smallcap World Fund is currently generating about 0.05 of returns per unit of risk over similar time horizon. If you would invest  6,782  in Smallcap World Fund on October 22, 2024 and sell it today you would earn a total of  42.00  from holding Smallcap World Fund or generate 0.62% return on investment over 90 days.

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

California Bond Fund  vs.  Smallcap World Fund

California Bond

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days California Bond Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong fundamental drivers, California Bond is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Smallcap World

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Smallcap World Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, Smallcap World is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with California Bond and Smallcap World

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

The idea behind California Bond Fund and Smallcap World 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.