Correlation Between Financial Industries and Small Company

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

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

Diversification Opportunities for Financial Industries and Small Company

0.9

Correlation Coefficient

Financial Industries  Small Company

Almost no diversification

The 3 months correlation between Financial and Small is 0.9. Overlapping area represents the amount of risk that can be diversified away by holding Financial Industries Fund and Small Pany Value in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Pany Value and Financial Industries 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 Financial Industries Fund are associated (or correlated) with Small Company. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Small Pany Value has no effect on the direction of Financial Industries i.e., Financial Industries and Small Company go up and down completely randomly.

Pair Corralation between Financial Industries and Small Company

Assuming the 90 days horizon Financial Industries is expected to generate 6.53 times less return on investment than Small Company. But when comparing it to its historical volatility, Financial Industries Fund is 1.19 times less risky than Small Company. It trades about 0.0 of its potential returns per unit of risk. Small Pany Value is currently generating about 0.02 of returns per unit of risk over similar time horizon. If you would invest  3,499  in Small Pany Value on May 10, 2025 and sell it today you would earn a total of  38.00  from holding Small Pany Value or generate 1.09% return on investment over 90 days.

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

Financial Industries Fund  vs.  Small Pany Value

Financial Industries

Risk-Adjusted Performance

Weakest

Over the last 90 days Financial Industries Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, Financial Industries is not utilizing all of its potentials. The latest stock price disturbance, may contribute to short-term losses for the investors.

Small Pany Value

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Small Pany Value are ranked lower than 1 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong forward indicators, Small Company is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Financial Industries and Small Company

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

The idea behind Financial Industries Fund and Small Pany Value 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 Options Analysis module to analyze and evaluate options and option chains as a potential hedge for your portfolios.