Correlation Between Large Company and Small Cap
Can any of the company-specific risk be diversified away by investing in both Large Company and Small Cap 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 Large Company and Small Cap into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Large Pany Value and Small Cap Value, you can compare the effects of market volatilities on Large Company and Small Cap 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 Large Company with a short position of Small Cap. Check out your portfolio center. Please also check ongoing floating volatility patterns of Large Company and Small Cap.
Diversification Opportunities for Large Company and Small Cap
0.77 | Correlation Coefficient |
Poor diversification
The 3 months correlation between Large and Small is 0.77. Overlapping area represents the amount of risk that can be diversified away by holding Large Pany Value and Small Cap Value in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Cap Value and Large Company 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 Large Pany Value are associated (or correlated) with Small Cap. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Small Cap Value has no effect on the direction of Large Company i.e., Large Company and Small Cap go up and down completely randomly.
Pair Corralation between Large Company and Small Cap
Assuming the 90 days horizon Large Company is expected to generate 4.09 times less return on investment than Small Cap. But when comparing it to its historical volatility, Large Pany Value is 2.67 times less risky than Small Cap. It trades about 0.13 of its potential returns per unit of risk. Small Cap Value is currently generating about 0.2 of returns per unit of risk over similar time horizon. If you would invest 1,104 in Small Cap Value on August 27, 2024 and sell it today you would earn a total of 81.00 from holding Small Cap Value or generate 7.34% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Significant |
| Accuracy | 100.0% |
| Values | Daily Returns |
Large Pany Value vs. Small Cap Value
Performance |
| Timeline |
| Large Pany Value |
| Small Cap Value |
Large Company and Small Cap Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Large Company and Small Cap
The main advantage of trading using opposite Large Company and Small Cap positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Large Company position performs unexpectedly, Small Cap 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 Cap will offset losses from the drop in Small Cap's long position.| Large Company vs. International Growth Fund | Large Company vs. Growth Fund Investor | Large Company vs. Ultra Fund Investor | Large Company vs. Strategic Allocation Aggressive |
| Small Cap vs. Value Fund Investor | Small Cap vs. Small Pany Fund | Small Cap vs. Mid Cap Value | Small Cap vs. Equity Income 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 Competition Analyzer module to analyze and compare many basic indicators for a group of related or unrelated entities.
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