Correlation Between Russell 2000 and Sp 500

Can any of the company-specific risk be diversified away by investing in both Russell 2000 and Sp 500 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 Russell 2000 and Sp 500 into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Russell 2000 Fund and Sp 500 Fund, you can compare the effects of market volatilities on Russell 2000 and Sp 500 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 Russell 2000 with a short position of Sp 500. Check out your portfolio center. Please also check ongoing floating volatility patterns of Russell 2000 and Sp 500.

Diversification Opportunities for Russell 2000 and Sp 500

0.87

Correlation Coefficient

Russell 2000  Sp 500

Very poor diversification

The 3 months correlation between Russell and RYSPX is 0.87. Overlapping area represents the amount of risk that can be diversified away by holding Russell 2000 Fund and Sp 500 Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Sp 500 Fund and Russell 2000 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 Russell 2000 Fund are associated (or correlated) with Sp 500. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Sp 500 Fund has no effect on the direction of Russell 2000 i.e., Russell 2000 and Sp 500 go up and down completely randomly.

Pair Corralation between Russell 2000 and Sp 500

Assuming the 90 days horizon Russell 2000 Fund is expected to under-perform the Sp 500. In addition to that, Russell 2000 is 1.34 times more volatile than Sp 500 Fund. It trades about -0.24 of its total potential returns per unit of risk. Sp 500 Fund is currently generating about -0.15 per unit of volatility. If you would invest  9,274  in Sp 500 Fund on October 8, 2024 and sell it today you would lose (268.00) from holding Sp 500 Fund or give up 2.89% of portfolio value over 90 days.

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

Russell 2000 Fund  vs.  Sp 500 Fund

Russell 2000

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Russell 2000 Fund are ranked lower than 2 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong technical indicators, Russell 2000 is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Sp 500 Fund

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Sp 500 Fund are ranked lower than 3 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Sp 500 is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Russell 2000 and Sp 500

The main advantage of trading using opposite Russell 2000 and Sp 500 positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Russell 2000 position performs unexpectedly, Sp 500 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 500 will offset losses from the drop in Sp 500's long position.

The idea behind Russell 2000 Fund and Sp 500 Fund 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 Portfolio Dashboard module to portfolio dashboard that provides centralized access to all your investments.