Correlation Between Mid Cap and Small Company
Can any of the company-specific risk be diversified away by investing in both Mid Cap and Small Company 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 Mid Cap and Small Company into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Mid Cap Value and Small Pany Fund, you can compare the effects of market volatilities on Mid Cap and Small Company 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 Mid Cap with a short position of Small Company. Check out your portfolio center. Please also check ongoing floating volatility patterns of Mid Cap and Small Company.
Diversification Opportunities for Mid Cap and Small Company
0.9 | Correlation Coefficient |
Almost no diversification
The 3 months correlation between Mid and Small is 0.9. Overlapping area represents the amount of risk that can be diversified away by holding Mid Cap Value and Small Pany Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Pany Fund and Mid 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 Mid Cap Value are associated (or correlated) with Small Company. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Small Pany Fund has no effect on the direction of Mid Cap i.e., Mid Cap and Small Company go up and down completely randomly.
Pair Corralation between Mid Cap and Small Company
Assuming the 90 days horizon Mid Cap is expected to generate 1.87 times less return on investment than Small Company. But when comparing it to its historical volatility, Mid Cap Value is 2.05 times less risky than Small Company. It trades about 0.2 of its potential returns per unit of risk. Small Pany Fund is currently generating about 0.19 of returns per unit of risk over similar time horizon. If you would invest 1,649 in Small Pany Fund on August 27, 2024 and sell it today you would earn a total of 104.00 from holding Small Pany Fund or generate 6.31% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Very Strong |
| Accuracy | 100.0% |
| Values | Daily Returns |
Mid Cap Value vs. Small Pany Fund
Performance |
| Timeline |
| Mid Cap Value |
| Small Pany Fund |
Mid Cap and Small Company Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Mid Cap and Small Company
The main advantage of trading using opposite Mid Cap and Small Company positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Mid Cap position performs unexpectedly, Small Company 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 Small Company will offset losses from the drop in Small Company's long position.| Mid Cap vs. Heritage Fund Investor | Mid Cap vs. Equity Income Fund | Mid Cap vs. Small Cap Value | Mid Cap vs. Utilities Fund Investor |
| Small Company vs. Small Cap Value | Small Company vs. Real Estate Fund | Small Company vs. Emerging Markets Fund | Small Company vs. Equity Growth Fund |
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 Sectors module to list of equity sectors categorizing publicly traded companies based on their primary business activities.
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