Correlation Between Sp 500 and Russell 2000
Can any of the company-specific risk be diversified away by investing in both Sp 500 and Russell 2000 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 Sp 500 and Russell 2000 into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Sp 500 Fund and Russell 2000 Fund, you can compare the effects of market volatilities on Sp 500 and Russell 2000 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 Sp 500 with a short position of Russell 2000. Check out your portfolio center. Please also check ongoing floating volatility patterns of Sp 500 and Russell 2000.
Diversification Opportunities for Sp 500 and Russell 2000
0.87 | Correlation Coefficient |
Very poor diversification
The 3 months correlation between RYSPX and Russell is 0.87. Overlapping area represents the amount of risk that can be diversified away by holding Sp 500 Fund and Russell 2000 Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Russell 2000 and Sp 500 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 Sp 500 Fund are associated (or correlated) with Russell 2000. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Russell 2000 has no effect on the direction of Sp 500 i.e., Sp 500 and Russell 2000 go up and down completely randomly.
Pair Corralation between Sp 500 and Russell 2000
Assuming the 90 days horizon Sp 500 is expected to generate 2.79 times less return on investment than Russell 2000. But when comparing it to its historical volatility, Sp 500 Fund is 1.89 times less risky than Russell 2000. It trades about 0.15 of its potential returns per unit of risk. Russell 2000 Fund is currently generating about 0.22 of returns per unit of risk over similar time horizon. If you would invest 5,437 in Russell 2000 Fund on August 30, 2024 and sell it today you would earn a total of 457.00 from holding Russell 2000 Fund or generate 8.41% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Strong |
| Accuracy | 95.65% |
| Values | Daily Returns |
Sp 500 Fund vs. Russell 2000 Fund
Performance |
| Timeline |
| Sp 500 Fund |
| Russell 2000 |
Sp 500 and Russell 2000 Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Sp 500 and Russell 2000
The main advantage of trading using opposite Sp 500 and Russell 2000 positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Sp 500 position performs unexpectedly, Russell 2000 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 Russell 2000 will offset losses from the drop in Russell 2000's long position.| Sp 500 vs. Vanguard Total Stock | Sp 500 vs. Vanguard 500 Index | Sp 500 vs. Vanguard Total Stock | Sp 500 vs. Vanguard Total Stock |
| Russell 2000 vs. Sp 500 Fund | Russell 2000 vs. Sp Midcap 400 | Russell 2000 vs. Russell 2000 2x | Russell 2000 vs. Sp 500 Pure |
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 Center module to all portfolio management and optimization tools to improve performance of your portfolios.
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