Correlation Between Small Cap and Blue Chip
Can any of the company-specific risk be diversified away by investing in both Small Cap and Blue Chip 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 Blue Chip into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Small Cap Special and Blue Chip Growth, you can compare the effects of market volatilities on Small Cap and Blue Chip 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 Blue Chip. Check out your portfolio center. Please also check ongoing floating volatility patterns of Small Cap and Blue Chip.
Diversification Opportunities for Small Cap and Blue Chip
Very poor diversification
The 3 months correlation between Small and Blue is 0.86. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Special and Blue Chip Growth in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Blue Chip Growth 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 Special are associated (or correlated) with Blue Chip. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Blue Chip Growth has no effect on the direction of Small Cap i.e., Small Cap and Blue Chip go up and down completely randomly.
Pair Corralation between Small Cap and Blue Chip
Assuming the 90 days horizon Small Cap Special is expected to generate 1.65 times more return on investment than Blue Chip. However, Small Cap is 1.65 times more volatile than Blue Chip Growth. It trades about 0.26 of its potential returns per unit of risk. Blue Chip Growth is currently generating about 0.27 per unit of risk. If you would invest 1,248 in Small Cap Special on September 2, 2024 and sell it today you would earn a total of 108.00 from holding Small Cap Special or generate 8.65% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Strong |
| Accuracy | 100.0% |
| Values | Daily Returns |
Small Cap Special vs. Blue Chip Growth
Performance |
| Timeline |
| Small Cap Special |
| Blue Chip Growth |
Small Cap and Blue Chip Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Small Cap and Blue Chip
The main advantage of trading using opposite Small Cap and Blue Chip positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Small Cap position performs unexpectedly, Blue Chip 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 Blue Chip will offset losses from the drop in Blue Chip's long position.| Small Cap vs. Moderately Aggressive Balanced | Small Cap vs. Target Retirement 2040 | Small Cap vs. Tiaa Cref Lifestyle Moderate | Small Cap vs. Calvert Moderate Allocation |
| Blue Chip vs. Mid Cap Index | Blue Chip vs. Mid Cap Strategic | Blue Chip vs. Valic Company I | Blue Chip vs. Stock Index Fund |
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 Balance Of Power module to check stock momentum by analyzing Balance Of Power indicator and other technical ratios.
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