Correlation Between Smallcap World and Global Small

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

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

Diversification Opportunities for Smallcap World and Global Small

0.84

Correlation Coefficient

Smallcap World  Global Small

Very poor diversification

The 3 months correlation between Smallcap and Global is 0.84. Overlapping area represents the amount of risk that can be diversified away by holding Smallcap World Fund and Global Small in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Global Small and Smallcap World 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 Smallcap World Fund are associated (or correlated) with Global Small. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Global Small has no effect on the direction of Smallcap World i.e., Smallcap World and Global Small go up and down completely randomly.

Pair Corralation between Smallcap World and Global Small

Assuming the 90 days horizon Smallcap World is expected to generate 1.6 times less return on investment than Global Small. But when comparing it to its historical volatility, Smallcap World Fund is 1.03 times less risky than Global Small. It trades about 0.04 of its potential returns per unit of risk. Global Small is currently generating about 0.06 of returns per unit of risk over similar time horizon. If you would invest  1,385  in Global Small on September 12, 2024 and sell it today you would earn a total of  282.00  from holding Global Small or generate 20.36% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	99.72%
Values	Daily Returns

Smallcap World Fund  vs.  Global Small

Smallcap World

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Smallcap World Fund are ranked lower than 8 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong technical and fundamental indicators, Smallcap World is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Global Small

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Global Small are ranked lower than 12 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak forward indicators, Global Small may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Smallcap World and Global Small

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

The idea behind Smallcap World Fund and Global Small 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 Pair Correlation module to compare performance and examine fundamental relationship between any two equity instruments.