Correlation Between Equity Index and Small Cap
Can any of the company-specific risk be diversified away by investing in both Equity Index 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 Index 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 Index Institutional and Small Cap Equity, you can compare the effects of market volatilities on Equity Index 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 Index with a short position of Small Cap. Check out your portfolio center. Please also check ongoing floating volatility patterns of Equity Index and Small Cap.
Diversification Opportunities for Equity Index and Small Cap
0.92 | Correlation Coefficient |
Almost no diversification
The 3 months correlation between Equity and Small is 0.92. Overlapping area represents the amount of risk that can be diversified away by holding Equity Index Institutional and Small Cap Equity in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Cap Equity and Equity Index 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 Index Institutional 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 Equity has no effect on the direction of Equity Index i.e., Equity Index and Small Cap go up and down completely randomly.
Pair Corralation between Equity Index and Small Cap
Assuming the 90 days horizon Equity Index Institutional is expected to generate 0.66 times more return on investment than Small Cap. However, Equity Index Institutional is 1.51 times less risky than Small Cap. It trades about 0.12 of its potential returns per unit of risk. Small Cap Equity is currently generating about 0.06 per unit of risk. If you would invest 4,422 in Equity Index Institutional on August 31, 2024 and sell it today you would earn a total of 1,749 from holding Equity Index Institutional or generate 39.55% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Very Strong |
| Accuracy | 100.0% |
| Values | Daily Returns |
Equity Index Institutional vs. Small Cap Equity
Performance |
| Timeline |
| Equity Index Institu |
| Small Cap Equity |
Equity Index and Small Cap Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Equity Index and Small Cap
The main advantage of trading using opposite Equity Index and Small Cap positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Equity Index 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 Index vs. Guidestone Fds Growth | Equity Index vs. Small Cap Equity | Equity Index vs. Value Equity Institutional | Equity Index vs. Medium Duration Bond Institutional |
| Small Cap vs. Vanguard Small Cap Index | Small Cap vs. T Rowe Price | Small Cap vs. HUMANA INC | Small Cap vs. SCOR PK |
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 My Watchlist Analysis module to analyze my current watchlist and to refresh optimization strategy. Macroaxis watchlist is based on self-learning algorithm to remember stocks you like.
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