Correlation Between Small Cap and Income Fund

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

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

Diversification Opportunities for Small Cap and Income Fund

0.52

Correlation Coefficient

Small Cap  Income Fund

Very weak diversification

The 3 months correlation between Small and Income is 0.52. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Stock and Income Fund Income in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Income Fund Income and 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 Small Cap Stock are associated (or correlated) with Income Fund. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Income Fund Income has no effect on the direction of Small Cap i.e., Small Cap and Income Fund go up and down completely randomly.

Pair Corralation between Small Cap and Income Fund

Assuming the 90 days horizon Small Cap Stock is expected to generate 4.27 times more return on investment than Income Fund. However, Small Cap is 4.27 times more volatile than Income Fund Income. It trades about 0.27 of its potential returns per unit of risk. Income Fund Income is currently generating about 0.11 per unit of risk. If you would invest  1,116  in Small Cap Stock on April 21, 2025 and sell it today you would earn a total of  238.00  from holding Small Cap Stock or generate 21.33% return on investment over 90 days.

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

Small Cap Stock  vs.  Income Fund Income

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 21 (%) 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.

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 8 (%) 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.

Pair Trading with Small Cap and Income Fund

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

The idea behind Small Cap Stock and Income Fund Income 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 Transaction History module to view history of all your transactions and understand their impact on performance.