Correlation Between Small Cap and Optimum Large

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

Diversification Opportunities for Small Cap and Optimum Large

0.95

Correlation Coefficient

Small Cap  Optimum Large

Almost no diversification

The 3 months correlation between Small and Optimum is 0.95. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Equity and Optimum Large Cap in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Optimum Large Cap 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 Optimum Large. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Optimum Large Cap has no effect on the direction of Small Cap i.e., Small Cap and Optimum Large go up and down completely randomly.

Pair Corralation between Small Cap and Optimum Large

Assuming the 90 days horizon Small Cap Equity is expected to generate 0.78 times more return on investment than Optimum Large. However, Small Cap Equity is 1.28 times less risky than Optimum Large. It trades about -0.12 of its potential returns per unit of risk. Optimum Large Cap is currently generating about -0.13 per unit of risk. If you would invest  1,783  in Small Cap Equity on December 29, 2024 and sell it today you would lose (146.00) from holding Small Cap Equity or give up 8.19% 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.  Optimum Large Cap

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.

Optimum Large Cap

Risk-Adjusted Performance

Very Weak

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

Pair Trading with Small Cap and Optimum Large

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

The idea behind Small Cap Equity and Optimum Large 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 Investing Opportunities module to build portfolios using our predefined set of ideas and optimize them against your investing preferences.