Correlation Between Small Cap and Vela Large

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

Diversification Opportunities for Small Cap and Vela Large

0.61

Correlation Coefficient

Small Cap  Vela Large

Poor diversification

The 3 months correlation between Small and Vela is 0.61. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Equity and Vela Large Cap in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Vela 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 Vela Large. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Vela Large Cap has no effect on the direction of Small Cap i.e., Small Cap and Vela Large go up and down completely randomly.

Pair Corralation between Small Cap and Vela Large

Assuming the 90 days horizon Small Cap Equity is expected to under-perform the Vela Large. In addition to that, Small Cap is 2.07 times more volatile than Vela Large Cap. It trades about -0.05 of its total potential returns per unit of risk. Vela Large Cap is currently generating about 0.17 per unit of volatility. If you would invest  1,651  in Vela Large Cap on December 2, 2024 and sell it today you would earn a total of  52.00  from holding Vela Large Cap or generate 3.15% return on investment over 90 days.

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

Small Cap Equity  vs.  Vela 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 weak performance in the last few months, the Fund's basic indicators remain fairly strong which may send shares a bit higher in April 2025. The current disturbance may also be a sign of long term up-swing for the fund investors.

Vela Large Cap

Risk-Adjusted Performance

Very Weak

Over the last 90 days Vela Large Cap 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.

Pair Trading with Small Cap and Vela Large

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

The idea behind Small Cap Equity and Vela 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 Idea Optimizer module to use advanced portfolio builder with pre-computed micro ideas to build optimal portfolio .