Correlation Between Government Securities and Small Cap

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

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

Diversification Opportunities for Government Securities and Small Cap

-0.66

Correlation Coefficient

Government Securities  Small Cap

Excellent diversification

The 3 months correlation between Government and Small is -0.66. Overlapping area represents the amount of risk that can be diversified away by holding Government Securities 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 Government Securities 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 Government Securities 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 Government Securities i.e., Government Securities and Small Cap go up and down completely randomly.

Pair Corralation between Government Securities and Small Cap

Assuming the 90 days horizon Government Securities Fund is expected to under-perform the Small Cap. But the mutual fund apears to be less risky and, when comparing its historical volatility, Government Securities Fund is 4.22 times less risky than Small Cap. The mutual fund trades about -0.04 of its potential returns per unit of risk. The Small Cap Index is currently generating about 0.16 of returns per unit of risk over similar time horizon. If you would invest  1,577  in Small Cap Index on September 3, 2024 and sell it today you would earn a total of  214.00  from holding Small Cap Index or generate 13.57% return on investment over 90 days.

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

Government Securities Fund  vs.  Small Cap Index

Government Securities

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Government Securities Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, Government Securities 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

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Small Cap Index are ranked lower than 12 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak essential indicators, Small Cap showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Government Securities and Small Cap

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

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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 Idea Breakdown module to analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes.