Correlation Between Large Cap and Small Cap
Can any of the company-specific risk be diversified away by investing in both Large Cap 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 Cap 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 Cap E and Small Cap Equity, you can compare the effects of market volatilities on Large Cap 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 Cap with a short position of Small Cap. Check out your portfolio center. Please also check ongoing floating volatility patterns of Large Cap and Small Cap.
Diversification Opportunities for Large Cap and Small Cap
Very poor diversification
The 3 months correlation between Large and Small is 0.84. Overlapping area represents the amount of risk that can be diversified away by holding Large Cap E 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 Large 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 Large Cap E 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 Large Cap i.e., Large Cap and Small Cap go up and down completely randomly.
Pair Corralation between Large Cap and Small Cap
Assuming the 90 days horizon Large Cap is expected to generate 1.19 times less return on investment than Small Cap. But when comparing it to its historical volatility, Large Cap E is 1.83 times less risky than Small Cap. It trades about 0.23 of its potential returns per unit of risk. Small Cap Equity is currently generating about 0.15 of returns per unit of risk over similar time horizon. If you would invest 3,388 in Small Cap Equity on August 25, 2024 and sell it today you would earn a total of 187.00 from holding Small Cap Equity or generate 5.52% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Strong |
| Accuracy | 100.0% |
| Values | Daily Returns |
Large Cap E vs. Small Cap Equity
Performance |
| Timeline |
| Large Cap E |
| Small Cap Equity |
Large Cap and Small Cap Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Large Cap and Small Cap
The main advantage of trading using opposite Large Cap and Small Cap positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Large Cap 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 Cap vs. Quantitative U S | Large Cap vs. Quantitative U S | Large Cap vs. Small Cap Equity | Large Cap vs. Large Cap Growth |
| Small Cap vs. Large Cap Growth | Small Cap vs. Lazard International Strategic | Small Cap vs. Equity Income Fund | Small Cap vs. Large Cap E |
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 Companies Directory module to evaluate performance of over 100,000 Stocks, Funds, and ETFs against different fundamentals.
Other Complementary Tools
| Fundamental Analysis View fundamental data based on most recent published financial statements | |
| Competition Analyzer Analyze and compare many basic indicators for a group of related or unrelated entities | |
| Stocks Directory Find actively traded stocks across global markets | |
| Global Markets Map Get a quick overview of global market snapshot using zoomable world map. Drill down to check world indexes | |
| Latest Portfolios Quick portfolio dashboard that showcases your latest portfolios |