Correlation Between Small Cap and GE Aerospace

Can any of the company-specific risk be diversified away by investing in both Small Cap and GE Aerospace 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 GE Aerospace 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 GE Aerospace, you can compare the effects of market volatilities on Small Cap and GE Aerospace 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 GE Aerospace. Check out your portfolio center. Please also check ongoing floating volatility patterns of Small Cap and GE Aerospace.

Diversification Opportunities for Small Cap and GE Aerospace

0.75

Correlation Coefficient

Small Cap  GE Aerospace

Poor diversification

The 3 months correlation between Small and GE Aerospace is 0.75. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Core and GE Aerospace in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on GE Aerospace 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 GE Aerospace. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of GE Aerospace has no effect on the direction of Small Cap i.e., Small Cap and GE Aerospace go up and down completely randomly.

Pair Corralation between Small Cap and GE Aerospace

Assuming the 90 days horizon Small Cap Core is expected to under-perform the GE Aerospace. But the mutual fund apears to be less risky and, when comparing its historical volatility, Small Cap Core is 2.05 times less risky than GE Aerospace. The mutual fund trades about -0.09 of its potential returns per unit of risk. The GE Aerospace is currently generating about 0.27 of returns per unit of risk over similar time horizon. If you would invest  13,536  in GE Aerospace on January 17, 2024 and sell it today you would earn a total of  1,834  from holding GE Aerospace or generate 13.55% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	95.24%
Values	Daily Returns

Small Cap Core  vs.  GE Aerospace

Small Cap Core

Risk-Adjusted Performance

3 of 100

Insignificant

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

GE Aerospace

Risk-Adjusted Performance

31 of 100

Very Strong

Compared to the overall equity markets, risk-adjusted returns on investments in GE Aerospace are ranked lower than 31 (%) of all global equities and portfolios over the last 90 days. In spite of rather abnormal technical and fundamental indicators, GE Aerospace exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Small Cap and GE Aerospace

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

The idea behind Small Cap Core and GE Aerospace 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 Alpha Finder module to use alpha and beta coefficients to find investment opportunities after accounting for the risk.