Correlation Between SP Small-Cap and Tandy Leather

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

By analyzing existing cross correlation between SP Small-Cap 600 and Tandy Leather Factory, you can compare the effects of market volatilities on SP Small-Cap and Tandy Leather 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 SP Small-Cap with a short position of Tandy Leather. Check out your portfolio center. Please also check ongoing floating volatility patterns of SP Small-Cap and Tandy Leather.

Diversification Opportunities for SP Small-Cap and Tandy Leather

0.81

Correlation Coefficient

SP Small-Cap  Tandy Leather

Very poor diversification

The 3 months correlation between SML and Tandy is 0.81. Overlapping area represents the amount of risk that can be diversified away by holding SP Small-Cap 600 and Tandy Leather Factory in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Tandy Leather Factory and SP Small-Cap 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 SP Small-Cap 600 are associated (or correlated) with Tandy Leather. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Tandy Leather Factory has no effect on the direction of SP Small-Cap i.e., SP Small-Cap and Tandy Leather go up and down completely randomly.

Pair Corralation between SP Small-Cap and Tandy Leather

Assuming the 90 days trading horizon SP Small-Cap is expected to generate 2.49 times less return on investment than Tandy Leather. But when comparing it to its historical volatility, SP Small-Cap 600 is 1.92 times less risky than Tandy Leather. It trades about 0.12 of its potential returns per unit of risk. Tandy Leather Factory is currently generating about 0.15 of returns per unit of risk over similar time horizon. If you would invest  285.00  in Tandy Leather Factory on May 2, 2025 and sell it today you would earn a total of  60.00  from holding Tandy Leather Factory or generate 21.05% return on investment over 90 days.

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

SP Small-Cap 600  vs.  Tandy Leather Factory

Pair Trading with SP Small-Cap and Tandy Leather

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

The idea behind SP Small-Cap 600 and Tandy Leather Factory 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 Bonds Directory module to find actively traded corporate debentures issued by US companies.