Correlation Between Small Cap and Blue Chip

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

By analyzing existing cross correlation between Small Cap Special and Blue Chip Growth, you can compare the effects of market volatilities on Small Cap and Blue Chip 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 Blue Chip. Check out your portfolio center. Please also check ongoing floating volatility patterns of Small Cap and Blue Chip.

Diversification Opportunities for Small Cap and Blue Chip

0.99

Correlation Coefficient

Small Cap  Blue Chip

No risk reduction

The 3 months correlation between Small and Blue is 0.99. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Special and Blue Chip Growth in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Blue Chip 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 Special are associated (or correlated) with Blue Chip. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Blue Chip Growth has no effect on the direction of Small Cap i.e., Small Cap and Blue Chip go up and down completely randomly.

Pair Corralation between Small Cap and Blue Chip

Assuming the 90 days horizon Small Cap Special is expected to generate 0.77 times more return on investment than Blue Chip. However, Small Cap Special is 1.31 times less risky than Blue Chip. It trades about -0.15 of its potential returns per unit of risk. Blue Chip Growth is currently generating about -0.15 per unit of risk. If you would invest  1,234  in Small Cap Special on December 28, 2024 and sell it today you would lose (156.00) from holding Small Cap Special or give up 12.64% 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 Special  vs.  Blue Chip Growth

Small Cap Special

Risk-Adjusted Performance

Very Weak

Over the last 90 days Small Cap Special 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.

Blue Chip Growth

Risk-Adjusted Performance

Very Weak

Over the last 90 days Blue Chip 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 fundamental 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 Blue Chip

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

The idea behind Small Cap Special and Blue Chip 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.

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 Portfolio Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.