Correlation Between Small Cap and International Equities

Can any of the company-specific risk be diversified away by investing in both Small Cap and International Equities 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 International Equities 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 International Equities Index, you can compare the effects of market volatilities on Small Cap and International Equities 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 International Equities. Check out your portfolio center. Please also check ongoing floating volatility patterns of Small Cap and International Equities.

Diversification Opportunities for Small Cap and International Equities

-0.55

Correlation Coefficient

Small Cap  International Equities

Excellent diversification

The 3 months correlation between Small and International is -0.55. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Special and International Equities Index in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on International Equities 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 International Equities. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of International Equities has no effect on the direction of Small Cap i.e., Small Cap and International Equities go up and down completely randomly.

Pair Corralation between Small Cap and International Equities

Assuming the 90 days horizon Small Cap Special is expected to under-perform the International Equities. In addition to that, Small Cap is 1.62 times more volatile than International Equities Index. It trades about -0.16 of its total potential returns per unit of risk. International Equities Index is currently generating about 0.17 per unit of volatility. If you would invest  780.00  in International Equities Index on December 23, 2024 and sell it today you would earn a total of  72.00  from holding International Equities Index or generate 9.23% return on investment over 90 days.

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

Small Cap Special  vs.  International Equities Index

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.

International Equities

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in International Equities Index are ranked lower than 13 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak technical and fundamental indicators, International Equities may actually be approaching a critical reversion point that can send shares even higher in April 2025.

Pair Trading with Small Cap and International Equities

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

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