Correlation Between Foreign Value and Small Cap

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

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

Diversification Opportunities for Foreign Value and Small Cap

-0.26

Correlation Coefficient

Foreign Value  Small Cap

Very good diversification

The 3 months correlation between Foreign and Small is -0.26. Overlapping area represents the amount of risk that can be diversified away by holding Foreign Value Fund and Small Cap Index in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Cap Index and Foreign Value 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 Foreign Value 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 Index has no effect on the direction of Foreign Value i.e., Foreign Value and Small Cap go up and down completely randomly.

Pair Corralation between Foreign Value and Small Cap

Assuming the 90 days horizon Foreign Value Fund is expected to generate 0.83 times more return on investment than Small Cap. However, Foreign Value Fund is 1.2 times less risky than Small Cap. It trades about 0.09 of its potential returns per unit of risk. Small Cap Index is currently generating about -0.15 per unit of risk. If you would invest  1,021  in Foreign Value Fund on December 29, 2024 and sell it today you would earn a total of  57.00  from holding Foreign Value Fund or generate 5.58% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	98.39%
Values	Daily Returns

Foreign Value Fund  vs.  Small Cap Index

Foreign Value

Risk-Adjusted Performance

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Foreign Value Fund are ranked lower than 6 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Foreign Value is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Small Cap Index

Risk-Adjusted Performance

Very Weak

Over the last 90 days Small Cap Index has generated negative risk-adjusted returns adding no value to fund investors. In spite of latest weak performance, the Fund's essential indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the fund investors.

Pair Trading with Foreign Value and Small Cap

The main advantage of trading using opposite Foreign Value and Small Cap positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Foreign Value 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 Foreign Value Fund and Small Cap Index 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.