Correlation Between Mid Cap and Global Small

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

By analyzing existing cross correlation between Mid Cap Value and Global Small Cap, you can compare the effects of market volatilities on Mid Cap and Global Small 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 Global Small. Check out your portfolio center. Please also check ongoing floating volatility patterns of Mid Cap and Global Small.

Diversification Opportunities for Mid Cap and Global Small

0.9

Correlation Coefficient

Mid Cap  Global Small

Almost no diversification

The 3 months correlation between Mid and Global is 0.9. Overlapping area represents the amount of risk that can be diversified away by holding Mid Cap Value and Global Small Cap in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Global Small Cap 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 Value are associated (or correlated) with Global Small. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Global Small Cap has no effect on the direction of Mid Cap i.e., Mid Cap and Global Small go up and down completely randomly.

Pair Corralation between Mid Cap and Global Small

Assuming the 90 days horizon Mid Cap is expected to generate 1.07 times less return on investment than Global Small. But when comparing it to its historical volatility, Mid Cap Value is 1.63 times less risky than Global Small. It trades about 0.14 of its potential returns per unit of risk. Global Small Cap is currently generating about 0.09 of returns per unit of risk over similar time horizon. If you would invest  1,768  in Global Small Cap on September 2, 2024 and sell it today you would earn a total of  236.00  from holding Global Small Cap or generate 13.35% return on investment over 90 days.

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

Mid Cap Value  vs.  Global Small Cap

Mid Cap Value

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Mid Cap Value are ranked lower than 9 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong technical and fundamental indicators, Mid Cap is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Global Small Cap

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Global Small Cap are ranked lower than 12 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Global Small may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Mid Cap and Global Small

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

The idea behind Mid Cap Value and Global Small Cap 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 Portfolio Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.