Correlation Between Small Cap and Equity Income

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

Diversification Opportunities for Small Cap and Equity Income

0.29

Correlation Coefficient

Small Cap  Equity Income

Modest diversification

The 3 months correlation between Small and Equity is 0.29. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Equity and Equity Income Portfolio in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Equity Income Portfolio 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 Income. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Equity Income Portfolio has no effect on the direction of Small Cap i.e., Small Cap and Equity Income go up and down completely randomly.

Pair Corralation between Small Cap and Equity Income

Assuming the 90 days horizon Small Cap Equity is expected to under-perform the Equity Income. In addition to that, Small Cap is 1.41 times more volatile than Equity Income Portfolio. It trades about -0.15 of its total potential returns per unit of risk. Equity Income Portfolio is currently generating about 0.03 per unit of volatility. If you would invest  1,454  in Equity Income Portfolio on December 29, 2024 and sell it today you would earn a total of  17.00  from holding Equity Income Portfolio or generate 1.17% return on investment over 90 days.

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

Small Cap Equity  vs.  Equity Income Portfolio

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 fundamental indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the fund investors.

Equity Income Portfolio

Risk-Adjusted Performance

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Equity Income Portfolio are ranked lower than 2 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong forward indicators, Equity Income 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 Income

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

The idea behind Small Cap Equity and Equity Income Portfolio 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.

Check out your portfolio center.

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 Global Markets Map module to get a quick overview of global market snapshot using zoomable world map. Drill down to check world indexes.