Correlation Between Sp Midcap and Sp Smallcap

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

By analyzing existing cross correlation between Sp Midcap 400 and Sp Smallcap 600, you can compare the effects of market volatilities on Sp Midcap and Sp Smallcap 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 Sp Midcap with a short position of Sp Smallcap. Check out your portfolio center. Please also check ongoing floating volatility patterns of Sp Midcap and Sp Smallcap.

Diversification Opportunities for Sp Midcap and Sp Smallcap

0.95

Correlation Coefficient

Sp Midcap  Sp Smallcap

Almost no diversification

The 3 months correlation between RYAVX and RYWAX is 0.95. Overlapping area represents the amount of risk that can be diversified away by holding Sp Midcap 400 and Sp Smallcap 600 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Sp Smallcap 600 and Sp Midcap 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 Sp Midcap 400 are associated (or correlated) with Sp Smallcap. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Sp Smallcap 600 has no effect on the direction of Sp Midcap i.e., Sp Midcap and Sp Smallcap go up and down completely randomly.

Pair Corralation between Sp Midcap and Sp Smallcap

Assuming the 90 days horizon Sp Midcap 400 is expected to generate 0.86 times more return on investment than Sp Smallcap. However, Sp Midcap 400 is 1.17 times less risky than Sp Smallcap. It trades about 0.21 of its potential returns per unit of risk. Sp Smallcap 600 is currently generating about 0.15 per unit of risk. If you would invest  7,113  in Sp Midcap 400 on September 8, 2024 and sell it today you would earn a total of  1,095  from holding Sp Midcap 400 or generate 15.39% return on investment over 90 days.

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

Sp Midcap 400  vs.  Sp Smallcap 600

Sp Midcap 400

Risk-Adjusted Performance

16 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Sp Midcap 400 are ranked lower than 16 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Sp Midcap showed solid returns over the last few months and may actually be approaching a breakup point.

Sp Smallcap 600

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Sp Smallcap 600 are ranked lower than 11 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Sp Smallcap may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Sp Midcap and Sp Smallcap

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

The idea behind Sp Midcap 400 and Sp Smallcap 600 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 Pair Correlation module to compare performance and examine fundamental relationship between any two equity instruments.