Correlation Between Mid-cap Value and Small-cap Value

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

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

Diversification Opportunities for Mid-cap Value and Small-cap Value

0.92

Correlation Coefficient

Mid-cap Value  Small-cap Value

Almost no diversification

The 3 months correlation between Mid-cap and Small-cap is 0.92. Overlapping area represents the amount of risk that can be diversified away by holding Mid Cap Value Profund and Small Cap Value Profund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Cap Value and Mid-cap Value 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 Value Profund are associated (or correlated) with Small-cap Value. 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 Value has no effect on the direction of Mid-cap Value i.e., Mid-cap Value and Small-cap Value go up and down completely randomly.

Pair Corralation between Mid-cap Value and Small-cap Value

Assuming the 90 days horizon Mid Cap Value Profund is expected to generate 0.77 times more return on investment than Small-cap Value. However, Mid Cap Value Profund is 1.3 times less risky than Small-cap Value. It trades about 0.18 of its potential returns per unit of risk. Small Cap Value Profund is currently generating about 0.14 per unit of risk. If you would invest  10,965  in Mid Cap Value Profund on September 1, 2024 and sell it today you would earn a total of  1,290  from holding Mid Cap Value Profund or generate 11.76% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Strong
Accuracy	98.44%
Values	Daily Returns

Mid Cap Value Profund  vs.  Small Cap Value Profund

Mid Cap Value

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Mid Cap Value Profund are ranked lower than 14 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak forward indicators, Mid-cap Value may actually be approaching a critical reversion point that can send shares even higher in December 2024.

Small Cap Value

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Small Cap Value Profund are ranked lower than 10 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Small-cap Value may actually be approaching a critical reversion point that can send shares even higher in December 2024.

Pair Trading with Mid-cap Value and Small-cap Value

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

The idea behind Mid Cap Value Profund and Small Cap Value 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.

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 Transaction History module to view history of all your transactions and understand their impact on performance.