Correlation Between Diversified Income and Smallcap World

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

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

Diversification Opportunities for Diversified Income and Smallcap World

0.96

Correlation Coefficient

Diversified Income  Smallcap World

Almost no diversification

The 3 months correlation between Diversified and Smallcap is 0.96. Overlapping area represents the amount of risk that can be diversified away by holding Diversified Income 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 Diversified Income 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 Diversified Income 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 Diversified Income i.e., Diversified Income and Smallcap World go up and down completely randomly.

Pair Corralation between Diversified Income and Smallcap World

Assuming the 90 days horizon Diversified Income is expected to generate 5.11 times less return on investment than Smallcap World. But when comparing it to its historical volatility, Diversified Income Fund is 3.62 times less risky than Smallcap World. It trades about 0.24 of its potential returns per unit of risk. Smallcap World Fund is currently generating about 0.34 of returns per unit of risk over similar time horizon. If you would invest  6,029  in Smallcap World Fund on April 17, 2025 and sell it today you would earn a total of  1,106  from holding Smallcap World Fund or generate 18.34% return on investment over 90 days.

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

Diversified Income Fund  vs.  Smallcap World Fund

Diversified Income

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Diversified Income Fund are ranked lower than 18 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong fundamental indicators, Diversified Income is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

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 26 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Smallcap World showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Diversified Income and Smallcap World

The main advantage of trading using opposite Diversified Income and Smallcap World positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Diversified Income 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 Diversified Income 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 Stock Tickers module to use high-impact, comprehensive, and customizable stock tickers that can be easily integrated to any websites.