Correlation Between Small Cap and Growth Portfolio

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

Diversification Opportunities for Small Cap and Growth Portfolio

0.9

Correlation Coefficient

Small Cap  Growth Portfolio

Almost no diversification

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

Pair Corralation between Small Cap and Growth Portfolio

Assuming the 90 days horizon Small Cap Growth is expected to generate 0.58 times more return on investment than Growth Portfolio. However, Small Cap Growth is 1.74 times less risky than Growth Portfolio. It trades about -0.06 of its potential returns per unit of risk. Growth Portfolio Class is currently generating about -0.04 per unit of risk. If you would invest  2,143  in Small Cap Growth on December 28, 2024 and sell it today you would lose (105.00) from holding Small Cap Growth or give up 4.9% 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.  Growth Portfolio Class

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.

Growth Portfolio Class

Risk-Adjusted Performance

Very Weak

Over the last 90 days Growth Portfolio Class has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong technical and fundamental indicators, Growth Portfolio 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 Growth Portfolio

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

The idea behind Small Cap Growth and Growth Portfolio Class 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.

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 Portfolio Anywhere module to track or share privately all of your investments from the convenience of any device.