Correlation Between Balanced Allocation and Smallcap World

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

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

Diversification Opportunities for Balanced Allocation and Smallcap World

1.0

Correlation Coefficient

Balanced Allocation  Smallcap World

No risk reduction

The 3 months correlation between Balanced and Smallcap is 1.0. Overlapping area represents the amount of risk that can be diversified away by holding Balanced Allocation Fund and Smallcap World Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Smallcap World and Balanced Allocation 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 Balanced Allocation Fund are associated (or correlated) with Smallcap World. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Smallcap World has no effect on the direction of Balanced Allocation i.e., Balanced Allocation and Smallcap World go up and down completely randomly.

Pair Corralation between Balanced Allocation and Smallcap World

Assuming the 90 days horizon Balanced Allocation is expected to generate 2.09 times less return on investment than Smallcap World. But when comparing it to its historical volatility, Balanced Allocation Fund is 2.12 times less risky than Smallcap World. It trades about 0.37 of its potential returns per unit of risk. Smallcap World Fund is currently generating about 0.37 of returns per unit of risk over similar time horizon. If you would invest  5,666  in Smallcap World Fund on April 20, 2025 and sell it today you would earn a total of  1,157  from holding Smallcap World Fund or generate 20.42% return on investment over 90 days.

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

Balanced Allocation Fund  vs.  Smallcap World Fund

Balanced Allocation

Risk-Adjusted Performance

Strong

Compared to the overall equity markets, risk-adjusted returns on investments in Balanced Allocation Fund are ranked lower than 29 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Balanced Allocation may actually be approaching a critical reversion point that can send shares even higher in August 2025.

Smallcap World

Risk-Adjusted Performance

Strong

Compared to the overall equity markets, risk-adjusted returns on investments in Smallcap World Fund are ranked lower than 29 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak technical and fundamental indicators, Smallcap World showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Balanced Allocation and Smallcap World

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

The idea behind Balanced Allocation Fund and Smallcap World 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 Price Transformation module to use Price Transformation models to analyze the depth of different equity instruments across global markets.