Correlation Between Small Cap and Dynamic Allocation

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

By analyzing existing cross correlation between Small Cap Special and Dynamic Allocation Fund, you can compare the effects of market volatilities on Small Cap and Dynamic Allocation 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 Dynamic Allocation. Check out your portfolio center. Please also check ongoing floating volatility patterns of Small Cap and Dynamic Allocation.

Diversification Opportunities for Small Cap and Dynamic Allocation

0.77

Correlation Coefficient

Small Cap  Dynamic Allocation

Poor diversification

The 3 months correlation between Small and Dynamic is 0.77. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Special and Dynamic Allocation Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Dynamic Allocation 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 Special are associated (or correlated) with Dynamic Allocation. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Dynamic Allocation has no effect on the direction of Small Cap i.e., Small Cap and Dynamic Allocation go up and down completely randomly.

Pair Corralation between Small Cap and Dynamic Allocation

Assuming the 90 days horizon Small Cap Special is expected to under-perform the Dynamic Allocation. In addition to that, Small Cap is 2.64 times more volatile than Dynamic Allocation Fund. It trades about 0.0 of its total potential returns per unit of risk. Dynamic Allocation Fund is currently generating about 0.21 per unit of volatility. If you would invest  1,028  in Dynamic Allocation Fund on May 12, 2025 and sell it today you would earn a total of  58.00  from holding Dynamic Allocation Fund or generate 5.64% return on investment over 90 days.

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

Small Cap Special  vs.  Dynamic Allocation Fund

Small Cap Special

Risk-Adjusted Performance

Weakest

Over the last 90 days Small Cap Special has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, Small Cap is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Dynamic Allocation

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Dynamic Allocation Fund are ranked lower than 16 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong technical and fundamental indicators, Dynamic Allocation 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 Dynamic Allocation

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

The idea behind Small Cap Special and Dynamic Allocation 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 USA ETFs module to find actively traded Exchange Traded Funds (ETF) in USA.