Correlation Between Small-cap Value and Intermediate Bond

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

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

Diversification Opportunities for Small-cap Value and Intermediate Bond

0.52

Correlation Coefficient

Small-cap Value  Intermediate Bond

Very weak diversification

The 3 months correlation between Small-cap and Intermediate is 0.52. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Value Fund and Intermediate Bond Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Intermediate Bond and Small-cap Value 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 Value Fund are associated (or correlated) with Intermediate Bond. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Intermediate Bond has no effect on the direction of Small-cap Value i.e., Small-cap Value and Intermediate Bond go up and down completely randomly.

Pair Corralation between Small-cap Value and Intermediate Bond

Assuming the 90 days horizon Small Cap Value Fund is expected to generate 5.41 times more return on investment than Intermediate Bond. However, Small-cap Value is 5.41 times more volatile than Intermediate Bond Fund. It trades about 0.1 of its potential returns per unit of risk. Intermediate Bond Fund is currently generating about 0.16 per unit of risk. If you would invest  3,477  in Small Cap Value Fund on May 18, 2025 and sell it today you would earn a total of  250.00  from holding Small Cap Value Fund or generate 7.19% return on investment over 90 days.

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

Small Cap Value Fund  vs.  Intermediate Bond Fund

Small Cap Value

Risk-Adjusted Performance

Fair

Compared to the overall equity markets, risk-adjusted returns on investments in Small Cap Value Fund are ranked lower than 7 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Small-cap Value may actually be approaching a critical reversion point that can send shares even higher in September 2025.

Intermediate Bond

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Intermediate Bond Fund are ranked lower than 12 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Intermediate Bond is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Small-cap Value and Intermediate Bond

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

The idea behind Small Cap Value Fund and Intermediate Bond 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 Investing Opportunities module to build portfolios using our predefined set of ideas and optimize them against your investing preferences.