Correlation Between Small Cap and Morningstar Unconstrained

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

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

Diversification Opportunities for Small Cap and Morningstar Unconstrained

0.86

Correlation Coefficient

Small Cap  Morningstar Unconstrained

Very poor diversification

The 3 months correlation between Small and Morningstar is 0.86. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Equity and Morningstar Unconstrained Allo in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Morningstar Unconstrained 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 Equity are associated (or correlated) with Morningstar Unconstrained. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Morningstar Unconstrained has no effect on the direction of Small Cap i.e., Small Cap and Morningstar Unconstrained go up and down completely randomly.

Pair Corralation between Small Cap and Morningstar Unconstrained

Assuming the 90 days horizon Small Cap Equity is expected to under-perform the Morningstar Unconstrained. In addition to that, Small Cap is 1.36 times more volatile than Morningstar Unconstrained Allocation. It trades about -0.2 of its total potential returns per unit of risk. Morningstar Unconstrained Allocation is currently generating about -0.09 per unit of volatility. If you would invest  1,086  in Morningstar Unconstrained Allocation on January 30, 2024 and sell it today you would lose (15.00) from holding Morningstar Unconstrained Allocation or give up 1.38% of portfolio value over 90 days.

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

Small Cap Equity  vs.  Morningstar Unconstrained Allo

Small Cap Equity

Risk-Adjusted Performance

0 of 100

Very Weak

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

Morningstar Unconstrained

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Morningstar Unconstrained Allocation are ranked lower than 6 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Morningstar Unconstrained 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 Morningstar Unconstrained

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

The idea behind Small Cap Equity and Morningstar Unconstrained Allocation 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 Price Exposure Probability module to analyze equity upside and downside potential for a given time horizon across multiple markets.