Correlation Between Equity Growth and Small Cap
Can any of the company-specific risk be diversified away by investing in both Equity Growth 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 Equity Growth and Small Cap into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Equity Growth Fund and Small Cap Value, you can compare the effects of market volatilities on Equity Growth 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 Equity Growth with a short position of Small Cap. Check out your portfolio center. Please also check ongoing floating volatility patterns of Equity Growth and Small Cap.
Diversification Opportunities for Equity Growth and Small Cap
0.87 | Correlation Coefficient |
Very poor diversification
The 3 months correlation between Equity and Small is 0.87. Overlapping area represents the amount of risk that can be diversified away by holding Equity Growth Fund 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 Equity Growth 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 Equity Growth Fund 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 Equity Growth i.e., Equity Growth and Small Cap go up and down completely randomly.
Pair Corralation between Equity Growth and Small Cap
Assuming the 90 days horizon Equity Growth Fund is expected to generate 34.85 times more return on investment than Small Cap. However, Equity Growth is 34.85 times more volatile than Small Cap Value. It trades about 0.04 of its potential returns per unit of risk. Small Cap Value is currently generating about 0.04 per unit of risk. If you would invest 2,228 in Equity Growth Fund on August 27, 2024 and sell it today you would earn a total of 1,188 from holding Equity Growth Fund or generate 53.32% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Strong |
| Accuracy | 100.0% |
| Values | Daily Returns |
Equity Growth Fund vs. Small Cap Value
Performance |
| Timeline |
| Equity Growth |
| Small Cap Value |
Equity Growth and Small Cap Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Equity Growth and Small Cap
The main advantage of trading using opposite Equity Growth and Small Cap positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Equity Growth 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.| Equity Growth vs. Mid Cap Value | Equity Growth vs. Income Growth Fund | Equity Growth vs. Diversified Bond Fund | Equity Growth vs. Emerging Markets Fund |
| 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 Watchlist Optimization module to optimize watchlists to build efficient portfolios or rebalance existing positions based on the mean-variance optimization algorithm.
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