Correlation Between Small Pany and Large Company

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

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

Diversification Opportunities for Small Pany and Large Company

0.89

Correlation Coefficient

Small Pany  Large Company

Very poor diversification

The 3 months correlation between Small and Large is 0.89. Overlapping area represents the amount of risk that can be diversified away by holding Small Pany Value and Large Pany Growth in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Large Pany Growth and Small Pany 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 Pany Value are associated (or correlated) with Large Company. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Large Pany Growth has no effect on the direction of Small Pany i.e., Small Pany and Large Company go up and down completely randomly.

Pair Corralation between Small Pany and Large Company

Assuming the 90 days horizon Small Pany is expected to generate 1.22 times less return on investment than Large Company. In addition to that, Small Pany is 1.29 times more volatile than Large Pany Growth. It trades about 0.14 of its total potential returns per unit of risk. Large Pany Growth is currently generating about 0.23 per unit of volatility. If you would invest  5,068  in Large Pany Growth on September 4, 2024 and sell it today you would earn a total of  783.00  from holding Large Pany Growth or generate 15.45% return on investment over 90 days.

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

Small Pany Value  vs.  Large Pany Growth

Small Pany Value

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Small Pany Value are ranked lower than 11 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Small Pany may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Large Pany Growth

Risk-Adjusted Performance

17 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Large Pany Growth are ranked lower than 17 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak technical and fundamental indicators, Large Company showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Small Pany and Large Company

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

The idea behind Small Pany Value and Large 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.

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 Fundamentals Comparison module to compare fundamentals across multiple equities to find investing opportunities.