Correlation Between Capital Southwest and Royce Micro

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

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

Diversification Opportunities for Capital Southwest and Royce Micro

0.94

Correlation Coefficient

Capital Southwest  Royce Micro

Almost no diversification

The 3 months correlation between Capital and Royce is 0.94. Overlapping area represents the amount of risk that can be diversified away by holding Capital Southwest and Royce Micro Cap in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Royce Micro Cap and Capital Southwest 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 Capital Southwest are associated (or correlated) with Royce Micro. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Royce Micro Cap has no effect on the direction of Capital Southwest i.e., Capital Southwest and Royce Micro go up and down completely randomly.

Pair Corralation between Capital Southwest and Royce Micro

Given the investment horizon of 90 days Capital Southwest is expected to generate 1.18 times more return on investment than Royce Micro. However, Capital Southwest is 1.18 times more volatile than Royce Micro Cap. It trades about 0.26 of its potential returns per unit of risk. Royce Micro Cap is currently generating about 0.29 per unit of risk. If you would invest  1,947  in Capital Southwest on April 25, 2025 and sell it today you would earn a total of  399.00  from holding Capital Southwest or generate 20.49% return on investment over 90 days.

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

Capital Southwest  vs.  Royce Micro Cap

Capital Southwest

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Capital Southwest are ranked lower than 20 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady basic indicators, Capital Southwest exhibited solid returns over the last few months and may actually be approaching a breakup point.

Royce Micro Cap

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Royce Micro Cap are ranked lower than 22 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively uncertain primary indicators, Royce Micro unveiled solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Capital Southwest and Royce Micro

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

The idea behind Capital Southwest and Royce Micro Cap 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 Fundamental Analysis module to view fundamental data based on most recent published financial statements.