Correlation Between Small Cap and Dow Jones
Can any of the company-specific risk be diversified away by investing in both Small Cap and Dow Jones 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 Dow Jones into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Small Cap Core and Dow Jones Industrial, you can compare the effects of market volatilities on Small Cap and Dow Jones 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 Dow Jones. Check out your portfolio center. Please also check ongoing floating volatility patterns of Small Cap and Dow Jones.
Diversification Opportunities for Small Cap and Dow Jones
Almost no diversification
The 3 months correlation between Small and Dow is 0.93. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Core and Dow Jones Industrial in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Dow Jones Industrial 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 Core are associated (or correlated) with Dow Jones. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Dow Jones Industrial has no effect on the direction of Small Cap i.e., Small Cap and Dow Jones go up and down completely randomly.
Pair Corralation between Small Cap and Dow Jones
Assuming the 90 days horizon Small Cap Core is expected to generate 1.77 times more return on investment than Dow Jones. However, Small Cap is 1.77 times more volatile than Dow Jones Industrial. It trades about 0.19 of its potential returns per unit of risk. Dow Jones Industrial is currently generating about 0.22 per unit of risk. If you would invest 1,393 in Small Cap Core on August 27, 2024 and sell it today you would earn a total of 93.00 from holding Small Cap Core or generate 6.68% 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 Core vs. Dow Jones Industrial
Performance |
| Timeline |
Small Cap and Dow Jones Volatility Contrast
Predicted Return Density |
| Returns |
Small Cap Core
Pair trading matchups for Small Cap
Dow Jones Industrial
Pair trading matchups for Dow Jones
Pair Trading with Small Cap and Dow Jones
The main advantage of trading using opposite Small Cap and Dow Jones positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Small Cap position performs unexpectedly, Dow Jones 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 Dow Jones will offset losses from the drop in Dow Jones' long position.| Small Cap vs. Pace High Yield | Small Cap vs. Needham Aggressive Growth | Small Cap vs. Metropolitan West High | Small Cap vs. Pioneer High Income |
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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 Holdings module to check your current holdings and cash postion to detemine if your portfolio needs rebalancing.
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