Correlation Between Stock Index and Small Cap
Can any of the company-specific risk be diversified away by investing in both Stock Index 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 Stock Index and Small Cap into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Stock Index Fund and Small Cap Special, you can compare the effects of market volatilities on Stock Index 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 Stock Index with a short position of Small Cap. Check out your portfolio center. Please also check ongoing floating volatility patterns of Stock Index and Small Cap.
Diversification Opportunities for Stock Index and Small Cap
0.87 | Correlation Coefficient |
Very poor diversification
The 3 months correlation between Stock and SMALL is 0.87. Overlapping area represents the amount of risk that can be diversified away by holding Stock Index Fund and Small Cap Special in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Cap Special and Stock Index 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 Stock Index Fund 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 Special has no effect on the direction of Stock Index i.e., Stock Index and Small Cap go up and down completely randomly.
Pair Corralation between Stock Index and Small Cap
Assuming the 90 days horizon Stock Index is expected to generate 1.5 times less return on investment than Small Cap. But when comparing it to its historical volatility, Stock Index Fund is 1.75 times less risky than Small Cap. It trades about 0.13 of its potential returns per unit of risk. Small Cap Special is currently generating about 0.12 of returns per unit of risk over similar time horizon. If you would invest 1,271 in Small Cap Special on August 30, 2024 and sell it today you would earn a total of 80.00 from holding Small Cap Special or generate 6.29% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Strong |
| Accuracy | 100.0% |
| Values | Daily Returns |
Stock Index Fund vs. Small Cap Special
Performance |
| Timeline |
| Stock Index Fund |
| Small Cap Special |
Stock Index and Small Cap Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Stock Index and Small Cap
The main advantage of trading using opposite Stock Index and Small Cap positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Stock Index 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.| Stock Index vs. Sterling Capital Short | Stock Index vs. Transamerica Funds | Stock Index vs. Barings Active Short | Stock Index vs. Touchstone Ohio Tax |
| Small Cap vs. Mid Cap Index | Small Cap vs. Mid Cap Strategic | Small Cap vs. Valic Company I | Small Cap vs. Valic Company I |
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 USA ETFs module to find actively traded Exchange Traded Funds (ETF) in USA.
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