Correlation Between Small Cap and Small Capitalization
Can any of the company-specific risk be diversified away by investing in both Small 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 Small 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 Small Cap Stock and Small Capitalization Portfolio, you can compare the effects of market volatilities on Small 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 Small Cap with a short position of Small Capitalization. Check out your portfolio center. Please also check ongoing floating volatility patterns of Small Cap and Small Capitalization.
Diversification Opportunities for Small Cap and Small Capitalization
0.98 | Correlation Coefficient |
Almost no diversification
The 3 months correlation between Small and Small is 0.98. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Stock and Small Capitalization Portfolio in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Capitalization 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 Stock 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 Small Cap i.e., Small Cap and Small Capitalization go up and down completely randomly.
Pair Corralation between Small Cap and Small Capitalization
Assuming the 90 days horizon Small Cap is expected to generate 1.12 times less return on investment than Small Capitalization. But when comparing it to its historical volatility, Small Cap Stock is 1.01 times less risky than Small Capitalization. It trades about 0.06 of its potential returns per unit of risk. Small Capitalization Portfolio is currently generating about 0.06 of returns per unit of risk over similar time horizon. If you would invest 526.00 in Small Capitalization Portfolio on August 28, 2024 and sell it today you would earn a total of 204.00 from holding Small Capitalization Portfolio or generate 38.78% 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 Stock vs. Small Capitalization Portfolio
Performance |
| Timeline |
| Small Cap Stock |
| Small Capitalization |
Small Cap and Small Capitalization Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Small Cap and Small Capitalization
The main advantage of trading using opposite Small Cap and Small Capitalization positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Small 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.| Small Cap vs. Capital Growth Fund | Small Cap vs. Emerging Markets Fund | Small Cap vs. High Income Fund | Small Cap vs. International Fund International |
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 My Watchlist Analysis module to analyze my current watchlist and to refresh optimization strategy. Macroaxis watchlist is based on self-learning algorithm to remember stocks you like.
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