Correlation Between Small Cap and Asset Allocation

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

By analyzing existing cross correlation between Small Cap Special and Asset Allocation Fund, you can compare the effects of market volatilities on Small Cap and Asset Allocation 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 Asset Allocation. Check out your portfolio center. Please also check ongoing floating volatility patterns of Small Cap and Asset Allocation.

Diversification Opportunities for Small Cap and Asset Allocation

0.97

Correlation Coefficient

Small Cap  Asset Allocation

Almost no diversification

The 3 months correlation between Small and ASSET is 0.97. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Special and Asset Allocation Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Asset Allocation 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 Special are associated (or correlated) with Asset Allocation. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Asset Allocation has no effect on the direction of Small Cap i.e., Small Cap and Asset Allocation go up and down completely randomly.

Pair Corralation between Small Cap and Asset Allocation

Assuming the 90 days horizon Small Cap Special is expected to under-perform the Asset Allocation. In addition to that, Small Cap is 1.62 times more volatile than Asset Allocation Fund. It trades about -0.16 of its total potential returns per unit of risk. Asset Allocation Fund is currently generating about -0.12 per unit of volatility. If you would invest  1,205  in Asset Allocation Fund on December 28, 2024 and sell it today you would lose (84.00) from holding Asset Allocation Fund or give up 6.97% of portfolio value over 90 days.

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

Small Cap Special  vs.  Asset Allocation Fund

Small Cap Special

Risk-Adjusted Performance

Very Weak

Over the last 90 days Small Cap Special 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.

Asset Allocation

Risk-Adjusted Performance

Very Weak

Over the last 90 days Asset Allocation Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of latest weak performance, the Fund's basic 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 Small Cap and Asset Allocation

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

The idea behind Small Cap Special and Asset Allocation 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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.