Correlation Between Technology Communications and Small Capitalization

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

By analyzing existing cross correlation between Technology Munications Portfolio and Small Capitalization Portfolio, you can compare the effects of market volatilities on Technology Communications and Small Capitalization 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 Technology Communications with a short position of Small Capitalization. Check out your portfolio center. Please also check ongoing floating volatility patterns of Technology Communications and Small Capitalization.

Diversification Opportunities for Technology Communications and Small Capitalization

0.75

Correlation Coefficient

Technology Communications  Small Capitalization

Poor diversification

The 3 months correlation between Technology and Small is 0.75. Overlapping area represents the amount of risk that can be diversified away by holding Technology Munications Portfol and Small Capitalization Portfolio in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Capitalization and Technology Communications 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 Technology Munications Portfolio are associated (or correlated) with Small Capitalization. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Small Capitalization has no effect on the direction of Technology Communications i.e., Technology Communications and Small Capitalization go up and down completely randomly.

Pair Corralation between Technology Communications and Small Capitalization

Assuming the 90 days horizon Technology Munications Portfolio is expected to generate 1.14 times more return on investment than Small Capitalization. However, Technology Communications is 1.14 times more volatile than Small Capitalization Portfolio. It trades about 0.14 of its potential returns per unit of risk. Small Capitalization Portfolio is currently generating about 0.09 per unit of risk. If you would invest  2,571  in Technology Munications Portfolio on March 3, 2024 and sell it today you would earn a total of  61.00  from holding Technology Munications Portfolio or generate 2.37% return on investment over 90 days.

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

Technology Munications Portfol  vs.  Small Capitalization Portfolio

Technology Communications

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Technology Munications Portfolio has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong forward indicators, Technology Communications is not utilizing all of its potentials. The recent stock price disturbance, may contribute to short-term losses for the investors.

Small Capitalization

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with Technology Communications and Small Capitalization

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

The idea behind Technology Munications Portfolio and Small Capitalization Portfolio 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 Price Exposure Probability module to analyze equity upside and downside potential for a given time horizon across multiple markets.