Correlation Between Small Cap and BASF SE

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

By analyzing existing cross correlation between Small Cap Core and BASF SE ADR, you can compare the effects of market volatilities on Small Cap and BASF SE 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 Cap with a short position of BASF SE. Check out your portfolio center. Please also check ongoing floating volatility patterns of Small Cap and BASF SE.

Diversification Opportunities for Small Cap and BASF SE

0.38

Correlation Coefficient

Small Cap  BASF SE

Weak diversification

The 3 months correlation between Small and BASF is 0.38. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Core and BASF SE ADR in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on BASF SE ADR and 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 Small Cap Core are associated (or correlated) with BASF SE. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of BASF SE ADR has no effect on the direction of Small Cap i.e., Small Cap and BASF SE go up and down completely randomly.

Pair Corralation between Small Cap and BASF SE

Assuming the 90 days horizon Small Cap is expected to generate 1.92 times less return on investment than BASF SE. But when comparing it to its historical volatility, Small Cap Core is 1.45 times less risky than BASF SE. It trades about 0.06 of its potential returns per unit of risk. BASF SE ADR is currently generating about 0.07 of returns per unit of risk over similar time horizon. If you would invest  1,252  in BASF SE ADR on June 24, 2024 and sell it today you would earn a total of  31.00  from holding BASF SE ADR or generate 2.48% return on investment over 90 days.

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

Small Cap Core  vs.  BASF SE ADR

Small Cap Core

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Small Cap Core are ranked lower than 8 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Small Cap may actually be approaching a critical reversion point that can send shares even higher in October 2024.

BASF SE ADR

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in BASF SE ADR are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. In spite of fairly strong technical and fundamental indicators, BASF SE is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Small Cap and BASF SE

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

The idea behind Small Cap Core and BASF SE ADR 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.

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 Portfolio Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.