Correlation Between Intermediate Term and Small Cap

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

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

Diversification Opportunities for Intermediate Term and Small Cap

0.71

Correlation Coefficient

Intermediate Term  Small Cap

Poor diversification

The 3 months correlation between Intermediate and Small is 0.71. Overlapping area represents the amount of risk that can be diversified away by holding Intermediate Term Bond Fund 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 Intermediate Term 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 Intermediate Term Bond Fund 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 Intermediate Term i.e., Intermediate Term and Small Cap go up and down completely randomly.

Pair Corralation between Intermediate Term and Small Cap

Assuming the 90 days horizon Intermediate Term is expected to generate 9.15 times less return on investment than Small Cap. But when comparing it to its historical volatility, Intermediate Term Bond Fund is 3.88 times less risky than Small Cap. It trades about 0.09 of its potential returns per unit of risk. Small Cap Stock is currently generating about 0.21 of returns per unit of risk over similar time horizon. If you would invest  1,186  in Small Cap Stock on April 24, 2025 and sell it today you would earn a total of  177.00  from holding Small Cap Stock or generate 14.92% return on investment over 90 days.

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

Intermediate Term Bond Fund  vs.  Small Cap Stock

Intermediate Term Bond

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Intermediate Term Bond Fund are ranked lower than 6 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong fundamental drivers, Intermediate Term 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 16 (%) 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 Intermediate Term and Small Cap

The main advantage of trading using opposite Intermediate Term and Small Cap positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Intermediate Term 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 Intermediate Term Bond Fund 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.

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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 Suggestion module to get suggestions outside of your existing asset allocation including your own model portfolios.