Correlation Between Science Technology and Small Cap

Can any of the company-specific risk be diversified away by investing in both Science Technology and Small Cap 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 Science Technology and Small Cap into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Science Technology Fund and Small Cap Stock, you can compare the effects of market volatilities on Science Technology and Small Cap 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 Science Technology with a short position of Small Cap. Check out your portfolio center. Please also check ongoing floating volatility patterns of Science Technology and Small Cap.

Diversification Opportunities for Science Technology and Small Cap

0.36

Correlation Coefficient

Science Technology  Small Cap

Weak diversification

The 3 months correlation between Science and Small is 0.36. Overlapping area represents the amount of risk that can be diversified away by holding Science Technology Fund and Small Cap Stock in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Cap Stock and Science Technology 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 Science Technology Fund are associated (or correlated) with Small Cap. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Small Cap Stock has no effect on the direction of Science Technology i.e., Science Technology and Small Cap go up and down completely randomly.

Pair Corralation between Science Technology and Small Cap

Assuming the 90 days horizon Science Technology Fund is expected to generate 1.29 times more return on investment than Small Cap. However, Science Technology is 1.29 times more volatile than Small Cap Stock. It trades about -0.05 of its potential returns per unit of risk. Small Cap Stock is currently generating about -0.23 per unit of risk. If you would invest  3,119  in Science Technology Fund on December 2, 2024 and sell it today you would lose (166.00) from holding Science Technology Fund or give up 5.32% of portfolio value over 90 days.

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

Science Technology Fund  vs.  Small Cap Stock

Science Technology

Risk-Adjusted Performance

Very Weak

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

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.

Pair Trading with Science Technology and Small Cap

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

The idea behind Science Technology Fund and Small Cap Stock 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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.