Correlation Between Small Cap and Mid Cap

Can any of the company-specific risk be diversified away by investing in both Small Cap and Mid Cap 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 Mid Cap 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 Mid Cap 15x Strategy, you can compare the effects of market volatilities on Small Cap and Mid Cap 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 Mid Cap. Check out your portfolio center. Please also check ongoing floating volatility patterns of Small Cap and Mid Cap.

Diversification Opportunities for Small Cap and Mid Cap

0.82

Correlation Coefficient

Small Cap  Mid Cap

Very poor diversification

The 3 months correlation between Small and Mid is 0.82. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Value and Mid Cap 15x Strategy in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Mid Cap 15x 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 Mid Cap. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Mid Cap 15x has no effect on the direction of Small Cap i.e., Small Cap and Mid Cap go up and down completely randomly.

Pair Corralation between Small Cap and Mid Cap

Assuming the 90 days horizon Small Cap Value is expected to under-perform the Mid Cap. In addition to that, Small Cap is 1.04 times more volatile than Mid Cap 15x Strategy. It trades about -0.08 of its total potential returns per unit of risk. Mid Cap 15x Strategy is currently generating about 0.01 per unit of volatility. If you would invest  13,329  in Mid Cap 15x Strategy on September 27, 2024 and sell it today you would earn a total of  58.00  from holding Mid Cap 15x Strategy or generate 0.44% return on investment over 90 days.

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

Small Cap Value  vs.  Mid Cap 15x Strategy

Small Cap Value

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Small Cap Value has generated negative risk-adjusted returns adding no value to fund investors. In spite of latest weak performance, the Fund's basic indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the fund investors.

Mid Cap 15x

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Mid Cap 15x Strategy has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong technical indicators, Mid Cap 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 Mid Cap

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

The idea behind Small Cap Value and Mid Cap 15x Strategy 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.