Correlation Between Us Large and Us Small

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

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

Diversification Opportunities for Us Large and Us Small

0.93

Correlation Coefficient

Us Large  Us Small

Almost no diversification

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

Pair Corralation between Us Large and Us Small

Assuming the 90 days horizon Us Large Cap is expected to under-perform the Us Small. But the mutual fund apears to be less risky and, when comparing its historical volatility, Us Large Cap is 1.51 times less risky than Us Small. The mutual fund trades about -0.2 of its potential returns per unit of risk. The Us Small Cap is currently generating about 0.09 of returns per unit of risk over similar time horizon. If you would invest  5,071  in Us Small Cap on September 16, 2024 and sell it today you would earn a total of  79.00  from holding Us Small Cap or generate 1.56% return on investment over 90 days.

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

Us Large Cap  vs.  Us Small Cap

Us Large Cap

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Us Large Cap are ranked lower than 4 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Us Large is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Us Small Cap

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Us Small Cap are ranked lower than 8 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Us Small may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Us Large and Us Small

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

The idea behind Us Large Cap and Us 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 Efficient Frontier module to plot and analyze your portfolio and positions against risk-return landscape of the market..