Correlation Between Large Company and Small Company

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

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

Diversification Opportunities for Large Company and Small Company

0.87

Correlation Coefficient

Large Company  Small Company

Very poor diversification

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

Pair Corralation between Large Company and Small Company

Assuming the 90 days horizon Large Pany Growth is expected to under-perform the Small Company. In addition to that, Large Company is 1.57 times more volatile than Small Pany Growth. It trades about -0.12 of its total potential returns per unit of risk. Small Pany Growth is currently generating about -0.15 per unit of volatility. If you would invest  1,837  in Small Pany Growth on December 3, 2024 and sell it today you would lose (196.00) from holding Small Pany Growth or give up 10.67% of portfolio value over 90 days.

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

Large Pany Growth  vs.  Small Pany Growth

Large Pany Growth

Risk-Adjusted Performance

Very Weak

Over the last 90 days Large Pany 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 technical and 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.

Small Pany Growth

Risk-Adjusted Performance

Very Weak

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

Pair Trading with Large Company and Small Company

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

The idea behind Large Pany Growth and Small Pany 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 Portfolio Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.