Correlation Between Small Cap and Aggressive Growth

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

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

Diversification Opportunities for Small Cap and Aggressive Growth

0.81

Correlation Coefficient

Small Cap  Aggressive Growth

Very poor diversification

The 3 months correlation between Small and Aggressive is 0.81. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Stock and Aggressive Growth Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Aggressive Growth 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 Stock are associated (or correlated) with Aggressive Growth. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Aggressive Growth has no effect on the direction of Small Cap i.e., Small Cap and Aggressive Growth go up and down completely randomly.

Pair Corralation between Small Cap and Aggressive Growth

Assuming the 90 days horizon Small Cap Stock is expected to under-perform the Aggressive Growth. But the mutual fund apears to be less risky and, when comparing its historical volatility, Small Cap Stock is 1.18 times less risky than Aggressive Growth. The mutual fund trades about -0.22 of its potential returns per unit of risk. The Aggressive Growth Fund is currently generating about -0.15 of returns per unit of risk over similar time horizon. If you would invest  6,162  in Aggressive Growth Fund on January 31, 2024 and sell it today you would lose (249.00) from holding Aggressive Growth Fund or give up 4.04% of portfolio value over 90 days.

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

Small Cap Stock  vs.  Aggressive Growth Fund

Small Cap Stock

Risk-Adjusted Performance

3 of 100

Very Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Small Cap Stock are ranked lower than 3 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong fundamental indicators, Small Cap is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Aggressive Growth

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Aggressive Growth Fund are ranked lower than 7 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak technical and fundamental indicators, Aggressive Growth may actually be approaching a critical reversion point that can send shares even higher in May 2024.

Pair Trading with Small Cap and Aggressive Growth

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

The idea behind Small Cap Stock and Aggressive Growth 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.

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 Analyst Advice module to analyst recommendations and target price estimates broken down by several categories.