Correlation Between Large Cap and Small Capitalization
Can any of the company-specific risk be diversified away by investing in both Large Cap and Small Capitalization 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 Capitalization into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Large Cap Value and Small Capitalization Portfolio, you can compare the effects of market volatilities on Large Cap and Small Capitalization 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 Capitalization. Check out your portfolio center. Please also check ongoing floating volatility patterns of Large Cap and Small Capitalization.
Diversification Opportunities for Large Cap and Small Capitalization
0.87 | Correlation Coefficient |
Very poor diversification
The 3 months correlation between Large and Small is 0.87. Overlapping area represents the amount of risk that can be diversified away by holding Large Cap Value and Small Capitalization Portfolio in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Capitalization 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 Value are associated (or correlated) with Small Capitalization. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Small Capitalization has no effect on the direction of Large Cap i.e., Large Cap and Small Capitalization go up and down completely randomly.
Pair Corralation between Large Cap and Small Capitalization
Assuming the 90 days horizon Large Cap is expected to generate 58.56 times less return on investment than Small Capitalization. But when comparing it to its historical volatility, Large Cap Value is 1.66 times less risky than Small Capitalization. It trades about 0.01 of its potential returns per unit of risk. Small Capitalization Portfolio is currently generating about 0.22 of returns per unit of risk over similar time horizon. If you would invest 671.00 in Small Capitalization Portfolio on August 25, 2024 and sell it today you would earn a total of 51.00 from holding Small Capitalization Portfolio or generate 7.6% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Strong |
| Accuracy | 100.0% |
| Values | Daily Returns |
Large Cap Value vs. Small Capitalization Portfolio
Performance |
| Timeline |
| Large Cap Value |
| Small Capitalization |
Large Cap and Small Capitalization Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Large Cap and Small Capitalization
The main advantage of trading using opposite Large Cap and Small Capitalization positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Large Cap position performs unexpectedly, Small Capitalization 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 Capitalization will offset losses from the drop in Small Capitalization's long position.| Large Cap vs. Pioneer High Yield | Large Cap vs. Pimco High Yield | Large Cap vs. Dunham High Yield | Large Cap vs. Prudential High Yield |
| Small Capitalization vs. Vanguard Small Cap Index | Small Capitalization vs. Vanguard Small Cap Index | Small Capitalization vs. Vanguard Small Cap Index | Small Capitalization vs. Fidelity Small Cap |
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 Instant Ratings module to determine any equity ratings based on digital recommendations. Macroaxis instant equity ratings are based on combination of fundamental analysis and risk-adjusted market performance.
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