Correlation Between Us Small and Largecap

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

By analyzing existing cross correlation between Us Small Cap and Largecap Sp 500, you can compare the effects of market volatilities on Us Small and Largecap 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 Us Small with a short position of Largecap. Check out your portfolio center. Please also check ongoing floating volatility patterns of Us Small and Largecap.

Diversification Opportunities for Us Small and Largecap

0.92

Correlation Coefficient

Us Small  Largecap

Almost no diversification

The 3 months correlation between DFSVX and Largecap is 0.92. Overlapping area represents the amount of risk that can be diversified away by holding Us Small Cap and Largecap Sp 500 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Largecap Sp 500 and Us 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 Us Small Cap are associated (or correlated) with Largecap. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Largecap Sp 500 has no effect on the direction of Us Small i.e., Us Small and Largecap go up and down completely randomly.

Pair Corralation between Us Small and Largecap

Assuming the 90 days horizon Us Small is expected to generate 1.05 times less return on investment than Largecap. In addition to that, Us Small is 1.92 times more volatile than Largecap Sp 500. It trades about 0.09 of its total potential returns per unit of risk. Largecap Sp 500 is currently generating about 0.18 per unit of volatility. If you would invest  2,777  in Largecap Sp 500 on September 16, 2024 and sell it today you would earn a total of  214.00  from holding Largecap Sp 500 or generate 7.71% return on investment over 90 days.

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

Us Small Cap  vs.  Largecap Sp 500

Us Small Cap

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Us Small Cap are ranked lower than 6 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Us Small may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Largecap Sp 500

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Largecap Sp 500 are ranked lower than 13 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak forward indicators, Largecap may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Us Small and Largecap

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

The idea behind Us Small Cap and Largecap Sp 500 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 Portfolio Manager module to state of the art Portfolio Manager to monitor and improve performance of your invested capital.