Correlation Between Income Fund and Small Cap

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

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

Diversification Opportunities for Income Fund and Small Cap

0.72

Correlation Coefficient

Income Fund  Small Cap

Poor diversification

The 3 months correlation between Income and Small is 0.72. Overlapping area represents the amount of risk that can be diversified away by holding Income Fund Income and Small Cap Stock in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Cap Stock and Income Fund 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 Income Fund Income are associated (or correlated) with Small Cap. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Small Cap Stock has no effect on the direction of Income Fund i.e., Income Fund and Small Cap go up and down completely randomly.

Pair Corralation between Income Fund and Small Cap

Assuming the 90 days horizon Income Fund is expected to generate 11.69 times less return on investment than Small Cap. But when comparing it to its historical volatility, Income Fund Income is 4.17 times less risky than Small Cap. It trades about 0.08 of its potential returns per unit of risk. Small Cap Stock is currently generating about 0.23 of returns per unit of risk over similar time horizon. If you would invest  1,186  in Small Cap Stock on April 25, 2025 and sell it today you would earn a total of  194.00  from holding Small Cap Stock or generate 16.36% return on investment over 90 days.

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

Income Fund Income  vs.  Small Cap Stock

Income Fund Income

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Income Fund Income are ranked lower than 6 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Income Fund is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Small Cap Stock

Risk-Adjusted Performance

Solid

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

Pair Trading with Income Fund and Small Cap

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

The idea behind Income Fund Income and Small Cap Stock 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.

Check out your portfolio center.

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 Technical Analysis module to check basic technical indicators and analysis based on most latest market data.