Correlation Between Small Company and Small Cap
Can any of the company-specific risk be diversified away by investing in both Small 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 Small 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 Small Pany Fund and Small Cap Value, you can compare the effects of market volatilities on Small 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 Small Company with a short position of Small Cap. Check out your portfolio center. Please also check ongoing floating volatility patterns of Small Company and Small Cap.
Diversification Opportunities for Small Company and Small Cap
0.98 | Correlation Coefficient |
Almost no diversification
The 3 months correlation between Small and Small is 0.98. Overlapping area represents the amount of risk that can be diversified away by holding Small Pany 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 Small 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 Small Pany 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 Small Company i.e., Small Company and Small Cap go up and down completely randomly.
Pair Corralation between Small Company and Small Cap
Assuming the 90 days horizon Small Company is expected to generate 1.29 times less return on investment than Small Cap. But when comparing it to its historical volatility, Small Pany Fund is 1.04 times less risky than Small Cap. It trades about 0.05 of its potential returns per unit of risk. Small Cap Value is currently generating about 0.06 of returns per unit of risk over similar time horizon. If you would invest 1,038 in Small Cap Value on August 24, 2024 and sell it today you would earn a total of 107.00 from holding Small Cap Value or generate 10.31% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Very Strong |
| Accuracy | 100.0% |
| Values | Daily Returns |
Small Pany Fund vs. Small Cap Value
Performance |
| Timeline |
| Small Pany Fund |
| Small Cap Value |
Small Company and Small Cap Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Small Company and Small Cap
The main advantage of trading using opposite Small Company and Small Cap positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Small 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.| Small Company vs. Small Cap Value | Small Company vs. Real Estate Fund | Small Company vs. Emerging Markets Fund | Small Company vs. Equity Growth 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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.
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