Correlation Between Small Cap and Equity Growth

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

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

Diversification Opportunities for Small Cap and Equity Growth

0.93

Correlation Coefficient

Small Cap  Equity Growth

Almost no diversification

The 3 months correlation between Small and Equity is 0.93. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Growth and Equity Growth Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Equity 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 Growth are associated (or correlated) with Equity Growth. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Equity Growth has no effect on the direction of Small Cap i.e., Small Cap and Equity Growth go up and down completely randomly.

Pair Corralation between Small Cap and Equity Growth

Assuming the 90 days horizon Small Cap Growth is expected to generate 1.24 times more return on investment than Equity Growth. However, Small Cap is 1.24 times more volatile than Equity Growth Fund. It trades about -0.06 of its potential returns per unit of risk. Equity Growth Fund is currently generating about -0.12 per unit of risk. If you would invest  2,143  in Small Cap Growth on December 29, 2024 and sell it today you would lose (116.00) from holding Small Cap Growth or give up 5.41% of portfolio value over 90 days.

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

Small Cap Growth  vs.  Equity Growth Fund

Small Cap Growth

Risk-Adjusted Performance

Very Weak

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

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.

Pair Trading with Small Cap and Equity Growth

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

The idea behind Small Cap Growth and Equity Growth 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 Idea Optimizer module to use advanced portfolio builder with pre-computed micro ideas to build optimal portfolio .