Correlation Between Pace Small/medium and Power Momentum

Can any of the company-specific risk be diversified away by investing in both Pace Small/medium and Power Momentum 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 Pace Small/medium and Power Momentum into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Pace Smallmedium Value and Power Momentum Index, you can compare the effects of market volatilities on Pace Small/medium and Power Momentum 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 Pace Small/medium with a short position of Power Momentum. Check out your portfolio center. Please also check ongoing floating volatility patterns of Pace Small/medium and Power Momentum.

Diversification Opportunities for Pace Small/medium and Power Momentum

0.97

Correlation Coefficient

Pace Small/medium  Power Momentum

Almost no diversification

The 3 months correlation between Pace and Power is 0.97. Overlapping area represents the amount of risk that can be diversified away by holding Pace Smallmedium Value and Power Momentum Index in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Power Momentum Index and Pace Small/medium 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 Pace Smallmedium Value are associated (or correlated) with Power Momentum. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Power Momentum Index has no effect on the direction of Pace Small/medium i.e., Pace Small/medium and Power Momentum go up and down completely randomly.

Pair Corralation between Pace Small/medium and Power Momentum

Assuming the 90 days horizon Pace Small/medium is expected to generate 1.41 times less return on investment than Power Momentum. In addition to that, Pace Small/medium is 1.06 times more volatile than Power Momentum Index. It trades about 0.08 of its total potential returns per unit of risk. Power Momentum Index is currently generating about 0.12 per unit of volatility. If you would invest  1,138  in Power Momentum Index on September 2, 2024 and sell it today you would earn a total of  395.00  from holding Power Momentum Index or generate 34.71% return on investment over 90 days.

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

Pace Smallmedium Value  vs.  Power Momentum Index

Pace Smallmedium Value

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Pace Smallmedium Value are ranked lower than 13 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Pace Small/medium may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Power Momentum Index

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Power Momentum Index are ranked lower than 13 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Power Momentum may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Pace Small/medium and Power Momentum

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

The idea behind Pace Smallmedium Value and Power Momentum Index 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 Transformation module to use Price Transformation models to analyze the depth of different equity instruments across global markets.