Correlation Between Small Cap and Small Company
Can any of the company-specific risk be diversified away by investing in both Small Cap and Small Company 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 Small Company 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 Small Pany Value, you can compare the effects of market volatilities on Small Cap and Small Company 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 Small Company. Check out your portfolio center. Please also check ongoing floating volatility patterns of Small Cap and Small Company.
Diversification Opportunities for Small Cap and Small Company
0.91 | Correlation Coefficient |
Almost no diversification
The 3 months correlation between Small and Small is 0.91. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Core and Small Pany Value in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Pany Value 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 Small Company. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Small Pany Value has no effect on the direction of Small Cap i.e., Small Cap and Small Company go up and down completely randomly.
Pair Corralation between Small Cap and Small Company
Assuming the 90 days horizon Small Cap Core is expected to generate 1.0 times more return on investment than Small Company. However, Small Cap Core is 1.0 times less risky than Small Company. It trades about 0.07 of its potential returns per unit of risk. Small Pany Value is currently generating about 0.07 per unit of risk. If you would invest 1,067 in Small Cap Core on August 29, 2024 and sell it today you would earn a total of 419.00 from holding Small Cap Core or generate 39.27% 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. Small Pany Value
Performance |
| Timeline |
| Small Cap Core |
| Small Pany Value |
Small Cap and Small Company Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Small Cap and Small Company
The main advantage of trading using opposite Small Cap and Small Company positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Small Cap position performs unexpectedly, Small Company 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 Company will offset losses from the drop in Small Company's long position.| Small Cap vs. The National Tax Free | Small Cap vs. Ishares Municipal Bond | Small Cap vs. Franklin High Yield | Small Cap vs. Gamco Global Telecommunications |
| Small Company vs. Small Pany Growth | Small Company vs. Large Pany Value | Small Company vs. Wilshire Large | Small Company vs. Small Pany Value |
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 Comparator module to compare the composition, asset allocations and performance of any two portfolios in your account.
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