Correlation Between Mid Cap and Small Cap
Can any of the company-specific risk be diversified away by investing in both Mid Cap and Small Cap 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 Mid Cap and Small Cap into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Mid Cap Index and Small Cap Stock, you can compare the effects of market volatilities on Mid Cap and Small Cap 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 Mid Cap with a short position of Small Cap. Check out your portfolio center. Please also check ongoing floating volatility patterns of Mid Cap and Small Cap.
Diversification Opportunities for Mid Cap and Small Cap
Very poor diversification
The 3 months correlation between Mid and Small is 0.89. Overlapping area represents the amount of risk that can be diversified away by holding Mid Cap Index and Small Cap Stock in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Cap Stock and Mid 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 Mid Cap Index are associated (or correlated) with Small Cap. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Small Cap Stock has no effect on the direction of Mid Cap i.e., Mid Cap and Small Cap go up and down completely randomly.
Pair Corralation between Mid Cap and Small Cap
Assuming the 90 days horizon Mid Cap Index is expected to generate 0.75 times more return on investment than Small Cap. However, Mid Cap Index is 1.32 times less risky than Small Cap. It trades about 0.01 of its potential returns per unit of risk. Small Cap Stock is currently generating about -0.06 per unit of risk. If you would invest 2,750 in Mid Cap Index on November 28, 2024 and sell it today you would earn a total of 18.00 from holding Mid Cap Index or generate 0.65% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Strong |
| Accuracy | 100.0% |
| Values | Daily Returns |
Mid Cap Index vs. Small Cap Stock
Performance |
| Timeline |
| Mid Cap Index |
| Small Cap Stock |
Mid Cap and Small Cap Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Mid Cap and Small Cap
The main advantage of trading using opposite Mid Cap and Small Cap positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Mid Cap position performs unexpectedly, Small Cap 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 Cap will offset losses from the drop in Small Cap's long position.| Mid Cap vs. Ms Global Fixed | Mid Cap vs. Mirova Global Green | Mid Cap vs. Barings Global Floating | Mid Cap vs. Investec Global Franchise |
| Small Cap vs. World Precious Minerals | Small Cap vs. Fidelity Advisor Gold | Small Cap vs. Global Gold Fund | Small Cap vs. The Gold Bullion |
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 Options Analysis module to analyze and evaluate options and option chains as a potential hedge for your portfolios.
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