Correlation Between Small Cap and Equity Income

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

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

Diversification Opportunities for Small Cap and Equity Income

0.71

Correlation Coefficient

Small Cap  Equity Income

Poor diversification

The 3 months correlation between Small and Equity is 0.71. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Value and Equity Income Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Equity Income 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 Value are associated (or correlated) with Equity Income. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Equity Income has no effect on the direction of Small Cap i.e., Small Cap and Equity Income go up and down completely randomly.

Pair Corralation between Small Cap and Equity Income

Assuming the 90 days horizon Small Cap Value is expected to generate 2.82 times more return on investment than Equity Income. However, Small Cap is 2.82 times more volatile than Equity Income Fund. It trades about 0.1 of its potential returns per unit of risk. Equity Income Fund is currently generating about -0.02 per unit of risk. If you would invest  1,080  in Small Cap Value on September 15, 2024 and sell it today you would earn a total of  87.00  from holding Small Cap Value or generate 8.06% return on investment over 90 days.

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

Small Cap Value  vs.  Equity Income Fund

Small Cap Value

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Small Cap Value are ranked lower than 8 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak forward indicators, Small Cap may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Equity Income

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Equity Income Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong forward indicators, Equity Income 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 Equity Income

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

The idea behind Small Cap Value and Equity Income Fund 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 Pair Correlation module to compare performance and examine fundamental relationship between any two equity instruments.