Correlation Between Small Cap and Ishares Russell

Can any of the company-specific risk be diversified away by investing in both Small Cap and Ishares Russell 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 Ishares Russell 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 Ishares Russell 1000, you can compare the effects of market volatilities on Small Cap and Ishares Russell 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 Ishares Russell. Check out your portfolio center. Please also check ongoing floating volatility patterns of Small Cap and Ishares Russell.

Diversification Opportunities for Small Cap and Ishares Russell

0.93

Correlation Coefficient

Small Cap  Ishares Russell

Almost no diversification

The 3 months correlation between Small and Ishares is 0.93. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Growth and Ishares Russell 1000 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Ishares Russell 1000 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 Ishares Russell. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Ishares Russell 1000 has no effect on the direction of Small Cap i.e., Small Cap and Ishares Russell go up and down completely randomly.

Pair Corralation between Small Cap and Ishares Russell

Assuming the 90 days horizon Small Cap is expected to generate 1.4 times less return on investment than Ishares Russell. In addition to that, Small Cap is 1.36 times more volatile than Ishares Russell 1000. It trades about 0.06 of its total potential returns per unit of risk. Ishares Russell 1000 is currently generating about 0.11 per unit of volatility. If you would invest  2,994  in Ishares Russell 1000 on September 20, 2024 and sell it today you would earn a total of  1,661  from holding Ishares Russell 1000 or generate 55.48% return on investment over 90 days.

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

Small Cap Growth  vs.  Ishares Russell 1000

Small Cap Growth

Risk-Adjusted Performance

0 of 100

Modest

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.

Ishares Russell 1000

Risk-Adjusted Performance

5 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Ishares Russell 1000 are ranked lower than 5 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Ishares Russell is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Small Cap and Ishares Russell

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

The idea behind Small Cap Growth and Ishares Russell 1000 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 Commodity Channel module to use Commodity Channel Index to analyze current equity momentum.