Correlation Between Small Cap and Total Market
Can any of the company-specific risk be diversified away by investing in both Small Cap and Total Market 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 Total Market into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Small Cap Equity and Total Market Portfolio, you can compare the effects of market volatilities on Small Cap and Total Market 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 Total Market. Check out your portfolio center. Please also check ongoing floating volatility patterns of Small Cap and Total Market.
Diversification Opportunities for Small Cap and Total Market
0.94 | Correlation Coefficient |
Almost no diversification
The 3 months correlation between Small and Total is 0.94. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Equity and Total Market Portfolio in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Total Market Portfolio 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 Equity are associated (or correlated) with Total Market. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Total Market Portfolio has no effect on the direction of Small Cap i.e., Small Cap and Total Market go up and down completely randomly.
Pair Corralation between Small Cap and Total Market
Assuming the 90 days horizon Small Cap Equity is expected to under-perform the Total Market. But the mutual fund apears to be less risky and, when comparing its historical volatility, Small Cap Equity is 1.02 times less risky than Total Market. The mutual fund trades about -0.31 of its potential returns per unit of risk. The Total Market Portfolio is currently generating about 0.0 of returns per unit of risk over similar time horizon. If you would invest 1,900 in Total Market Portfolio on November 27, 2024 and sell it today you would earn a total of 0.00 from holding Total Market Portfolio or generate 0.0% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Very Strong |
| Accuracy | 100.0% |
| Values | Daily Returns |
Small Cap Equity vs. Total Market Portfolio
Performance |
| Timeline |
| Small Cap Equity |
| Total Market Portfolio |
Small Cap and Total Market Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Small Cap and Total Market
The main advantage of trading using opposite Small Cap and Total Market positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Small Cap position performs unexpectedly, Total Market 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 Total Market will offset losses from the drop in Total Market's long position.| Small Cap vs. John Hancock Disciplined | Small Cap vs. Oppenheimer International Growth | Small Cap vs. Hartford Schroders Emerging | Small Cap vs. Edgewood Growth Fund |
| Total Market vs. Edgewood Growth Fund | Total Market vs. Johcm International Select | Total Market vs. Invesco Senior Loan | Total Market vs. Doubleline Shiller Enhanced |
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 Equity Analysis module to research over 250,000 global equities including funds, stocks and ETFs to find investment opportunities.
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