Correlation Between Mid Cap and Small Cap

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

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

Diversification Opportunities for Mid Cap and Small Cap

0.98

Correlation Coefficient

Mid Cap  Small Cap

Almost no diversification

The 3 months correlation between Mid and Small is 0.98. Overlapping area represents the amount of risk that can be diversified away by holding Mid Cap Growth Profund and Small Cap Growth Profund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Cap Growth and Mid 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 Mid Cap Growth Profund 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 Growth has no effect on the direction of Mid Cap i.e., Mid Cap and Small Cap go up and down completely randomly.

Pair Corralation between Mid Cap and Small Cap

Assuming the 90 days horizon Mid Cap Growth Profund is expected to generate 0.76 times more return on investment than Small Cap. However, Mid Cap Growth Profund is 1.31 times less risky than Small Cap. It trades about -0.01 of its potential returns per unit of risk. Small Cap Growth Profund is currently generating about -0.04 per unit of risk. If you would invest  10,829  in Mid Cap Growth Profund on September 30, 2024 and sell it today you would lose (135.00) from holding Mid Cap Growth Profund or give up 1.25% of portfolio value over 90 days.

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

Mid Cap Growth Profund  vs.  Small Cap Growth Profund

Mid Cap Growth

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Mid Cap Growth Profund has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong forward indicators, Mid Cap is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Small Cap Growth

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Small Cap Growth Profund has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong forward 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 Mid Cap and Small Cap

The main advantage of trading using opposite Mid Cap and Small Cap positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Mid Cap 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 Mid Cap Growth Profund and Small Cap Growth Profund 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 Earnings Calls module to check upcoming earnings announcements updated hourly across public exchanges.