Correlation Between Small-cap Value and Short Term

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

By analyzing existing cross correlation between Small Cap Value Series and Short Term Municipal Bond, you can compare the effects of market volatilities on Small-cap Value and Short Term 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 Short Term. Check out your portfolio center. Please also check ongoing floating volatility patterns of Small-cap Value and Short Term.

Diversification Opportunities for Small-cap Value and Short Term

0.86

Correlation Coefficient

Small-cap Value  Short Term

Very poor diversification

The 3 months correlation between Small-cap and Short is 0.86. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Value Series and Short Term Municipal Bond in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Short Term Municipal 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 Series are associated (or correlated) with Short Term. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Short Term Municipal has no effect on the direction of Small-cap Value i.e., Small-cap Value and Short Term go up and down completely randomly.

Pair Corralation between Small-cap Value and Short Term

Assuming the 90 days horizon Small Cap Value Series is expected to generate 16.66 times more return on investment than Short Term. However, Small-cap Value is 16.66 times more volatile than Short Term Municipal Bond. It trades about 0.06 of its potential returns per unit of risk. Short Term Municipal Bond is currently generating about 0.41 per unit of risk. If you would invest  1,404  in Small Cap Value Series on May 11, 2025 and sell it today you would earn a total of  46.00  from holding Small Cap Value Series or generate 3.28% return on investment over 90 days.

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

Small Cap Value Series  vs.  Short Term Municipal Bond

Small Cap Value

Risk-Adjusted Performance

Soft

Compared to the overall equity markets, risk-adjusted returns on investments in Small Cap Value Series are ranked lower than 4 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong fundamental indicators, Small-cap Value is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Short Term Municipal

Risk-Adjusted Performance

High

Compared to the overall equity markets, risk-adjusted returns on investments in Short Term Municipal Bond are ranked lower than 32 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong forward indicators, Short Term 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 Short Term

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

The idea behind Small Cap Value Series and Short Term Municipal Bond 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 Portfolio Dashboard module to portfolio dashboard that provides centralized access to all your investments.