Correlation Between Small Cap and Equity Index

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

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

Diversification Opportunities for Small Cap and Equity Index

0.92

Correlation Coefficient

Small Cap  Equity Index

Almost no diversification

The 3 months correlation between Small and Equity is 0.92. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Equity and Equity Index Institutional in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Equity Index Institu 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 Equity are associated (or correlated) with Equity Index. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Equity Index Institu has no effect on the direction of Small Cap i.e., Small Cap and Equity Index go up and down completely randomly.

Pair Corralation between Small Cap and Equity Index

Assuming the 90 days horizon Small Cap Equity is expected to under-perform the Equity Index. In addition to that, Small Cap is 1.14 times more volatile than Equity Index Institutional. It trades about -0.1 of its total potential returns per unit of risk. Equity Index Institutional is currently generating about -0.06 per unit of volatility. If you would invest  6,005  in Equity Index Institutional on December 26, 2024 and sell it today you would lose (247.00) from holding Equity Index Institutional or give up 4.11% 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 Equity  vs.  Equity Index Institutional

Small Cap Equity

Risk-Adjusted Performance

Very Weak

Over the last 90 days Small Cap Equity has generated negative risk-adjusted returns adding no value to fund investors. In spite of latest weak performance, the Fund's basic indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the fund investors.

Equity Index Institu

Risk-Adjusted Performance

Very Weak

Over the last 90 days Equity Index Institutional has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, Equity Index 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 Equity Index

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

The idea behind Small Cap Equity and Equity Index Institutional 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 Analyzer module to analyze all characteristics, volatility and risk-adjusted return of Macroaxis ideas.