Correlation Between Small-company Stock and Short-term Bond
Can any of the company-specific risk be diversified away by investing in both Small-company Stock and Short-term Bond 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-company Stock and Short-term Bond into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Small Company Stock Fund and Short Term Bond Fund, you can compare the effects of market volatilities on Small-company Stock and Short-term Bond 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-company Stock with a short position of Short-term Bond. Check out your portfolio center. Please also check ongoing floating volatility patterns of Small-company Stock and Short-term Bond.
Diversification Opportunities for Small-company Stock and Short-term Bond
0.75 | Correlation Coefficient |
Poor diversification
The 3 months correlation between Small-company and Short-term is 0.75. Overlapping area represents the amount of risk that can be diversified away by holding Small Company Stock Fund and Short Term Bond Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Short Term Bond and Small-company Stock 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 Company Stock Fund are associated (or correlated) with Short-term Bond. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Short Term Bond has no effect on the direction of Small-company Stock i.e., Small-company Stock and Short-term Bond go up and down completely randomly.
Pair Corralation between Small-company Stock and Short-term Bond
Assuming the 90 days horizon Small Company Stock Fund is expected to generate 8.11 times more return on investment than Short-term Bond. However, Small-company Stock is 8.11 times more volatile than Short Term Bond Fund. It trades about 0.07 of its potential returns per unit of risk. Short Term Bond Fund is currently generating about 0.16 per unit of risk. If you would invest 2,473 in Small Company Stock Fund on June 4, 2025 and sell it today you would earn a total of 87.00 from holding Small Company Stock Fund or generate 3.52% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Significant |
| Accuracy | 97.62% |
| Values | Daily Returns |
Small Company Stock Fund vs. Short Term Bond Fund
Performance |
| Timeline |
| Small-company Stock |
| Short Term Bond |
Small-company Stock and Short-term Bond Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Small-company Stock and Short-term Bond
The main advantage of trading using opposite Small-company Stock and Short-term Bond positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Small-company Stock position performs unexpectedly, Short-term Bond 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 Short-term Bond will offset losses from the drop in Short-term Bond's long position.The idea behind Small Company Stock Fund and Short Term Bond Fund 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.
| Short-term Bond vs. Payden High Income | Short-term Bond vs. Strategic Advisers Income | Short-term Bond vs. Neuberger Berman Income | Short-term Bond vs. Msift High Yield |
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 Global Correlations module to find global opportunities by holding instruments from different markets.
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