Correlation Between Small Cap and Growth Equity

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

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

Diversification Opportunities for Small Cap and Growth Equity

0.91

Correlation Coefficient

Small Cap  Growth Equity

Almost no diversification

The 3 months correlation between Small and Growth is 0.91. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Equity and Growth Equity Investor in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Growth Equity Investor 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 Equity are associated (or correlated) with Growth Equity. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Growth Equity Investor has no effect on the direction of Small Cap i.e., Small Cap and Growth Equity go up and down completely randomly.

Pair Corralation between Small Cap and Growth Equity

Assuming the 90 days horizon Small Cap Equity is expected to generate 1.31 times more return on investment than Growth Equity. However, Small Cap is 1.31 times more volatile than Growth Equity Investor. It trades about 0.16 of its potential returns per unit of risk. Growth Equity Investor is currently generating about 0.21 per unit of risk. If you would invest  1,780  in Small Cap Equity on August 31, 2024 and sell it today you would earn a total of  224.00  from holding Small Cap Equity or generate 12.58% return on investment over 90 days.

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

Small Cap Equity  vs.  Growth Equity Investor

Small Cap Equity

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Small Cap Equity are ranked lower than 12 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Small Cap may actually be approaching a critical reversion point that can send shares even higher in December 2024.

Growth Equity Investor

Risk-Adjusted Performance

16 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Growth Equity Investor are ranked lower than 16 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Growth Equity may actually be approaching a critical reversion point that can send shares even higher in December 2024.

Pair Trading with Small Cap and Growth Equity

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

The idea behind Small Cap Equity and Growth Equity Investor 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 Idea Analyzer module to analyze all characteristics, volatility and risk-adjusted return of Macroaxis ideas.