Correlation Between Equity Growth and Small Company

Can any of the company-specific risk be diversified away by investing in both Equity Growth and Small Company 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 Equity Growth and Small Company into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Equity Growth Fund and Small Pany Fund, you can compare the effects of market volatilities on Equity Growth and Small Company 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 Equity Growth with a short position of Small Company. Check out your portfolio center. Please also check ongoing floating volatility patterns of Equity Growth and Small Company.

Diversification Opportunities for Equity Growth and Small Company

0.95

Correlation Coefficient

Equity Growth  Small Company

Almost no diversification

The 3 months correlation between Equity and Small is 0.95. Overlapping area represents the amount of risk that can be diversified away by holding Equity Growth Fund and Small Pany Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Pany Fund and Equity Growth 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 Equity Growth Fund are associated (or correlated) with Small Company. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Small Pany Fund has no effect on the direction of Equity Growth i.e., Equity Growth and Small Company go up and down completely randomly.

Pair Corralation between Equity Growth and Small Company

Assuming the 90 days horizon Equity Growth Fund is expected to under-perform the Small Company. But the mutual fund apears to be less risky and, when comparing its historical volatility, Equity Growth Fund is 1.12 times less risky than Small Company. The mutual fund trades about -0.12 of its potential returns per unit of risk. The Small Pany Fund is currently generating about -0.08 of returns per unit of risk over similar time horizon. If you would invest  1,611  in Small Pany Fund on December 29, 2024 and sell it today you would lose (93.00) from holding Small Pany Fund or give up 5.77% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Strong
Accuracy	100.0%
Values	Daily Returns

Equity Growth Fund  vs.  Small Pany Fund

Equity Growth

Risk-Adjusted Performance

Very Weak

Over the last 90 days Equity Growth Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of latest weak performance, the Fund's forward indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the fund investors.

Small Pany Fund

Risk-Adjusted Performance

Very Weak

Over the last 90 days Small Pany Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong forward indicators, Small Company is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Equity Growth and Small Company

The main advantage of trading using opposite Equity Growth and Small Company positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Equity Growth position performs unexpectedly, Small Company 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 Company will offset losses from the drop in Small Company's long position.

The idea behind Equity Growth Fund and Small Pany Fund pairs trading is to make the combined position market-neutral, meaning the overall market's direction will not affect its win or loss (or potential downside or upside). This can be achieved by designing a pairs trade with two highly correlated stocks or equities that operate in a similar space or sector, making it possible to obtain profits through simple and relatively low-risk investment.

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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 Piotroski F Score module to get Piotroski F Score based on the binary analysis strategy of nine different fundamentals.