Correlation Between Equity Income and Small Cap

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

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

Diversification Opportunities for Equity Income and Small Cap

0.51

Correlation Coefficient

Equity Income  Small Cap

Very weak diversification

The 3 months correlation between Equity and Small is 0.51. Overlapping area represents the amount of risk that can be diversified away by holding Equity Income Portfolio and Small Cap Equity in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Cap Equity and Equity Income 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 Equity Income Portfolio are associated (or correlated) with Small Cap. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Small Cap Equity has no effect on the direction of Equity Income i.e., Equity Income and Small Cap go up and down completely randomly.

Pair Corralation between Equity Income and Small Cap

Assuming the 90 days horizon Equity Income Portfolio is expected to under-perform the Small Cap. In addition to that, Equity Income is 1.9 times more volatile than Small Cap Equity. It trades about -0.33 of its total potential returns per unit of risk. Small Cap Equity is currently generating about -0.28 per unit of volatility. If you would invest  3,490  in Small Cap Equity on October 7, 2024 and sell it today you would lose (196.00) from holding Small Cap Equity or give up 5.62% of portfolio value over 90 days.

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

Equity Income Portfolio  vs.  Small Cap Equity

Equity Income Portfolio

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Equity Income Portfolio 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.

Small Cap Equity

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Small Cap Equity are ranked lower than 2 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Small Cap is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Equity Income and Small Cap

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

The idea behind Equity Income Portfolio and Small Cap Equity 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 Equity Valuation module to check real value of public entities based on technical and fundamental data.