Correlation Between Equity Income and Small Cap

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

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

Diversification Opportunities for Equity Income and Small Cap

0.96

Correlation Coefficient

Equity Income  Small Cap

Almost no diversification

The 3 months correlation between Equity and Small is 0.96. Overlapping area represents the amount of risk that can be diversified away by holding Equity Income Fund and Small Cap Value in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Cap Value and Equity Income 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 Equity Income Fund 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 Value has no effect on the direction of Equity Income i.e., Equity Income and Small Cap go up and down completely randomly.

Pair Corralation between Equity Income and Small Cap

Assuming the 90 days horizon Equity Income Fund is expected to generate 0.48 times more return on investment than Small Cap. However, Equity Income Fund is 2.07 times less risky than Small Cap. It trades about 0.05 of its potential returns per unit of risk. Small Cap Value is currently generating about -0.23 per unit of risk. If you would invest  872.00  in Equity Income Fund on November 28, 2024 and sell it today you would earn a total of  4.00  from holding Equity Income Fund or generate 0.46% return on investment over 90 days.

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

Equity Income Fund  vs.  Small Cap Value

Equity Income

Risk-Adjusted Performance

Very Weak

Over the last 90 days Equity Income Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of latest weak performance, the Fund's basic indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the fund investors.

Small Cap Value

Risk-Adjusted Performance

Very Weak

Over the last 90 days Small Cap Value has generated negative risk-adjusted returns adding no value to fund investors. In spite of weak performance in the last few months, the Fund's basic indicators remain fairly strong which may send shares a bit higher in March 2025. The current disturbance may also be a sign of long term up-swing for the fund investors.

Pair Trading with Equity Income and Small Cap

The main advantage of trading using opposite Equity Income and Small Cap positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Equity Income 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 Equity Income Fund and Small Cap Value 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 ETFs module to find actively traded Exchange Traded Funds (ETF) from around the world.