Correlation Between Balanced Allocation and Small Capitalization

Can any of the company-specific risk be diversified away by investing in both Balanced Allocation and Small Capitalization 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 Small Capitalization 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 Small Capitalization Portfolio, you can compare the effects of market volatilities on Balanced Allocation and Small Capitalization 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 Small Capitalization. Check out your portfolio center. Please also check ongoing floating volatility patterns of Balanced Allocation and Small Capitalization.

Diversification Opportunities for Balanced Allocation and Small Capitalization

0.98

Correlation Coefficient

Balanced Allocation  Small Capitalization

Almost no diversification

The 3 months correlation between Balanced and Small is 0.98. Overlapping area represents the amount of risk that can be diversified away by holding Balanced Allocation Fund and Small Capitalization Portfolio in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Capitalization 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 Small Capitalization. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Small Capitalization has no effect on the direction of Balanced Allocation i.e., Balanced Allocation and Small Capitalization go up and down completely randomly.

Pair Corralation between Balanced Allocation and Small Capitalization

Assuming the 90 days horizon Balanced Allocation is expected to generate 2.03 times less return on investment than Small Capitalization. But when comparing it to its historical volatility, Balanced Allocation Fund is 3.02 times less risky than Small Capitalization. It trades about 0.32 of its potential returns per unit of risk. Small Capitalization Portfolio is currently generating about 0.22 of returns per unit of risk over similar time horizon. If you would invest  622.00  in Small Capitalization Portfolio on April 25, 2025 and sell it today you would earn a total of  90.00  from holding Small Capitalization Portfolio or generate 14.47% 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.  Small Capitalization Portfolio

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 25 (%) 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.

Small Capitalization

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Small Capitalization Portfolio are ranked lower than 17 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Small Capitalization showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Balanced Allocation and Small Capitalization

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

The idea behind Balanced Allocation Fund and Small Capitalization Portfolio 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 Pair Correlation module to compare performance and examine fundamental relationship between any two equity instruments.