Correlation Between EAFE Small-Cap and SP Smallcap

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Can any of the company-specific risk be diversified away by investing in both EAFE Small-Cap and SP Smallcap 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 EAFE Small-Cap and SP Smallcap into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between EAFE Small-Cap Ishares and SP Smallcap Intl, you can compare the effects of market volatilities on EAFE Small-Cap and SP Smallcap 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 EAFE Small-Cap with a short position of SP Smallcap. Check out your portfolio center. Please also check ongoing floating volatility patterns of EAFE Small-Cap and SP Smallcap.

Diversification Opportunities for EAFE Small-Cap and SP Smallcap

0.0
  Correlation Coefficient

Pay attention - limited upside

The 3 months correlation between EAFE Small-Cap and SP Smallcap is 0.0. Overlapping area represents the amount of risk that can be diversified away by holding EAFE Small-Cap Ishares and SP Smallcap Intl in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on SP Smallcap Intl and EAFE 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 EAFE Small-Cap Ishares are associated (or correlated) with SP Smallcap. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of SP Smallcap Intl has no effect on the direction of EAFE Small-Cap i.e., EAFE Small-Cap and SP Smallcap go up and down completely randomly.

Pair Corralation between EAFE Small-Cap and SP Smallcap

If you would invest  5,429  in EAFE Small-Cap Ishares on May 17, 2022 and sell it today you would earn a total of  527.00  from holding EAFE Small-Cap Ishares or generate 9.71% return on investment over 90 days.
Time Period3 Months [change]
DirectionFlat 
StrengthInsignificant
Accuracy0.0%
ValuesDaily Returns

EAFE Small-Cap Ishares  vs.  SP Smallcap Intl

 Performance (%) 
       Timeline  
EAFE Small-Cap Ishares 
EAFE Small-Cap Performance
0 of 100
Over the last 90 days EAFE Small-Cap Ishares has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong fundamental indicators, EAFE Small-Cap is not utilizing all of its potentials. The latest stock price disturbance, may contribute to short-term losses for the investors.

EAFE Small-Cap Price Channel

SP Smallcap Intl 
SP Smallcap Performance
0 of 100
Over the last 90 days SP Smallcap Intl has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong basic indicators, SP Smallcap is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

EAFE Small-Cap and SP Smallcap Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with EAFE Small-Cap and SP Smallcap

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

SP Smallcap Intl

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The effect of pair diversification on risk is to reduce it, but we should note this doesn't apply to all risk types. When we trade pairs against SP Smallcap as a counterpart, there is always some inherent risk that will never be diversified away no matter what. This volatility limits the effect of tactical diversification using pair trading. SP Smallcap's systematic risk is the inherent uncertainty of the entire market, and therefore cannot be mitigated even by pair-trading it against the equity that is not highly correlated to it. On the other hand, SP Smallcap's unsystematic risk describes the types of risk that we can protect against, at least to some degree, by selecting a matching pair that is not perfectly correlated to SP Smallcap Intl.
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 Portfolio Suggestion module to get suggestions outside of your existing asset allocation including your own model portfolios.

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