Correlation Between Small Cap and Large Company
Can any of the company-specific risk be diversified away by investing in both Small Cap and Large 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 Small Cap and Large Company into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Small Cap Growth and Large Pany Value, you can compare the effects of market volatilities on Small Cap and Large 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 Small Cap with a short position of Large Company. Check out your portfolio center. Please also check ongoing floating volatility patterns of Small Cap and Large Company.
Diversification Opportunities for Small Cap and Large Company
0.71 | Correlation Coefficient |
Poor diversification
The 3 months correlation between Small and Large is 0.71. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Growth and Large Pany Value in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Large Pany Value 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 Growth are associated (or correlated) with Large Company. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Large Pany Value has no effect on the direction of Small Cap i.e., Small Cap and Large Company go up and down completely randomly.
Pair Corralation between Small Cap and Large Company
Assuming the 90 days horizon Small Cap Growth is expected to generate 1.89 times more return on investment than Large Company. However, Small Cap is 1.89 times more volatile than Large Pany Value. It trades about 0.07 of its potential returns per unit of risk. Large Pany Value is currently generating about 0.09 per unit of risk. If you would invest 1,751 in Small Cap Growth on September 2, 2024 and sell it today you would earn a total of 559.00 from holding Small Cap Growth or generate 31.92% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Significant |
| Accuracy | 100.0% |
| Values | Daily Returns |
Small Cap Growth vs. Large Pany Value
Performance |
| Timeline |
| Small Cap Growth |
| Large Pany Value |
Small Cap and Large Company Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Small Cap and Large Company
The main advantage of trading using opposite Small Cap and Large Company positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Small Cap position performs unexpectedly, Large 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 Large Company will offset losses from the drop in Large Company's long position.| Small Cap vs. Mid Cap Value | Small Cap vs. Equity Growth Fund | Small Cap vs. Income Growth Fund | Small Cap vs. Diversified Bond Fund |
| Large Company vs. Small Pany Fund | Large Company vs. Value Fund Investor | Large Company vs. Small Cap Value | Large Company vs. Real Estate 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 Portfolio File Import module to quickly import all of your third-party portfolios from your local drive in csv format.
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