Correlation Between Small Cap and Large Capital

Can any of the company-specific risk be diversified away by investing in both Small Cap and Large Capital 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 Large Capital 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 Large Capital Growth, you can compare the effects of market volatilities on Small Cap and Large Capital 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 Large Capital. Check out your portfolio center. Please also check ongoing floating volatility patterns of Small Cap and Large Capital.

Diversification Opportunities for Small Cap and Large Capital

0.74

Correlation Coefficient

Small Cap  Large Capital

Poor diversification

The 3 months correlation between Small and Large is 0.74. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Special and Large Capital Growth in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Large Capital 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 Large Capital. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Large Capital Growth has no effect on the direction of Small Cap i.e., Small Cap and Large Capital go up and down completely randomly.

Pair Corralation between Small Cap and Large Capital

Assuming the 90 days horizon Small Cap Special is expected to generate 1.5 times more return on investment than Large Capital. However, Small Cap is 1.5 times more volatile than Large Capital Growth. It trades about 0.08 of its potential returns per unit of risk. Large Capital Growth is currently generating about 0.11 per unit of risk. If you would invest  1,098  in Small Cap Special on September 2, 2024 and sell it today you would earn a total of  258.00  from holding Small Cap Special or generate 23.5% return on investment over 90 days.

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

Small Cap Special  vs.  Large Capital Growth

Small Cap Special

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Small Cap Special are ranked lower than 9 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Small Cap may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Large Capital Growth

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Large Capital Growth are ranked lower than 11 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong technical and fundamental indicators, Large Capital is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Small Cap and Large Capital

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

The idea behind Small Cap Special and Large Capital 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 My Watchlist Analysis module to analyze my current watchlist and to refresh optimization strategy. Macroaxis watchlist is based on self-learning algorithm to remember stocks you like.