Correlation Between IShares Small and IShares SP

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

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

Diversification Opportunities for IShares Small and IShares SP

0.96

Correlation Coefficient

IShares Small  IShares SP

Almost no diversification

The 3 months correlation between IShares and IShares is 0.96. Overlapping area represents the amount of risk that can be diversified away by holding iShares Small Cap and iShares SP Mid Cap in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on iShares SP Mid and IShares Small 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 iShares Small Cap are associated (or correlated) with IShares SP. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of iShares SP Mid has no effect on the direction of IShares Small i.e., IShares Small and IShares SP go up and down completely randomly.

Pair Corralation between IShares Small and IShares SP

Assuming the 90 days trading horizon IShares Small is expected to generate 1.16 times less return on investment than IShares SP. In addition to that, IShares Small is 1.34 times more volatile than iShares SP Mid Cap. It trades about 0.17 of its total potential returns per unit of risk. iShares SP Mid Cap is currently generating about 0.26 per unit of volatility. If you would invest  3,125  in iShares SP Mid Cap on August 31, 2024 and sell it today you would earn a total of  524.00  from holding iShares SP Mid Cap or generate 16.77% return on investment over 90 days.

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

iShares Small Cap  vs.  iShares SP Mid Cap

iShares Small Cap

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in iShares Small Cap are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. In spite of very unfluctuating basic indicators, IShares Small displayed solid returns over the last few months and may actually be approaching a breakup point.

iShares SP Mid

Risk-Adjusted Performance

20 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in iShares SP Mid Cap are ranked lower than 20 (%) of all global equities and portfolios over the last 90 days. In spite of very unfluctuating fundamental indicators, IShares SP displayed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with IShares Small and IShares SP

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

The idea behind iShares Small Cap and iShares SP Mid Cap 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 Commodity Channel module to use Commodity Channel Index to analyze current equity momentum.