Correlation Between Hercules Capital and Capital Southwest

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

By analyzing existing cross correlation between Hercules Capital and Capital Southwest, you can compare the effects of market volatilities on Hercules Capital and Capital Southwest 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 Hercules Capital with a short position of Capital Southwest. Check out your portfolio center. Please also check ongoing floating volatility patterns of Hercules Capital and Capital Southwest.

Diversification Opportunities for Hercules Capital and Capital Southwest

0.62

Correlation Coefficient

Hercules Capital  Capital Southwest

Poor diversification

The 3 months correlation between Hercules and Capital is 0.62. Overlapping area represents the amount of risk that can be diversified away by holding Hercules Capital and Capital Southwest in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Capital Southwest and Hercules Capital 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 Hercules Capital are associated (or correlated) with Capital Southwest. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Capital Southwest has no effect on the direction of Hercules Capital i.e., Hercules Capital and Capital Southwest go up and down completely randomly.

Pair Corralation between Hercules Capital and Capital Southwest

Given the investment horizon of 90 days Hercules Capital is expected to generate 1.13 times less return on investment than Capital Southwest. But when comparing it to its historical volatility, Hercules Capital is 1.22 times less risky than Capital Southwest. It trades about 0.32 of its potential returns per unit of risk. Capital Southwest is currently generating about 0.3 of returns per unit of risk over similar time horizon. If you would invest  2,466  in Capital Southwest on February 2, 2024 and sell it today you would earn a total of  152.00  from holding Capital Southwest or generate 6.16% return on investment over 90 days.

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

Hercules Capital  vs.  Capital Southwest

Hercules Capital

Risk-Adjusted Performance

17 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Hercules Capital are ranked lower than 17 (%) of all global equities and portfolios over the last 90 days. In spite of rather unfluctuating technical and fundamental indicators, Hercules Capital exhibited solid returns over the last few months and may actually be approaching a breakup point.

Capital Southwest

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Capital Southwest are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. In spite of rather weak basic indicators, Capital Southwest may actually be approaching a critical reversion point that can send shares even higher in June 2024.

Pair Trading with Hercules Capital and Capital Southwest

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

The idea behind Hercules Capital and Capital Southwest 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.