Correlation Between Small Cap and Growth Fund

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

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

Diversification Opportunities for Small Cap and Growth Fund

0.93

Correlation Coefficient

Small Cap  Growth Fund

Almost no diversification

The 3 months correlation between Small and Growth is 0.93. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Stock and Growth Fund Growth in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Growth Fund Growth and Small 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 Small Cap Stock are associated (or correlated) with Growth Fund. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Growth Fund Growth has no effect on the direction of Small Cap i.e., Small Cap and Growth Fund go up and down completely randomly.

Pair Corralation between Small Cap and Growth Fund

Assuming the 90 days horizon Small Cap Stock is expected to under-perform the Growth Fund. But the mutual fund apears to be less risky and, when comparing its historical volatility, Small Cap Stock is 1.08 times less risky than Growth Fund. The mutual fund trades about -0.05 of its potential returns per unit of risk. The Growth Fund Growth is currently generating about 0.0 of returns per unit of risk over similar time horizon. If you would invest  3,733  in Growth Fund Growth on December 4, 2024 and sell it today you would lose (35.00) from holding Growth Fund Growth or give up 0.94% of portfolio value over 90 days.

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

Small Cap Stock  vs.  Growth Fund Growth

Small Cap Stock

Risk-Adjusted Performance

Very Weak

Over the last 90 days Small Cap Stock 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 April 2025. The current disturbance may also be a sign of long term up-swing for the fund investors.

Growth Fund Growth

Risk-Adjusted Performance

Very Weak

Over the last 90 days Growth Fund Growth 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 April 2025. The current disturbance may also be a sign of long term up-swing for the fund investors.

Pair Trading with Small Cap and Growth Fund

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

The idea behind Small Cap Stock and Growth Fund Growth 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 Bond Analysis module to evaluate and analyze corporate bonds as a potential investment for your portfolios..