Correlation Between Small Company and Small-company Stock

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

By analyzing existing cross correlation between Small Pany Growth and Small Company Stock Fund, you can compare the effects of market volatilities on Small Company and Small-company Stock 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 Company with a short position of Small-company Stock. Check out your portfolio center. Please also check ongoing floating volatility patterns of Small Company and Small-company Stock.

Diversification Opportunities for Small Company and Small-company Stock

0.93

Correlation Coefficient

Small Company  Small-company Stock

Almost no diversification

The 3 months correlation between Small and Small-company is 0.93. Overlapping area represents the amount of risk that can be diversified away by holding Small Pany Growth and Small Company Stock Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small-company Stock and Small Company 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 Pany Growth are associated (or correlated) with Small-company Stock. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Small-company Stock has no effect on the direction of Small Company i.e., Small Company and Small-company Stock go up and down completely randomly.

Pair Corralation between Small Company and Small-company Stock

Assuming the 90 days horizon Small Pany Growth is expected to generate 1.5 times more return on investment than Small-company Stock. However, Small Company is 1.5 times more volatile than Small Company Stock Fund. It trades about 0.35 of its potential returns per unit of risk. Small Company Stock Fund is currently generating about 0.2 per unit of risk. If you would invest  1,121  in Small Pany Growth on September 5, 2024 and sell it today you would earn a total of  526.00  from holding Small Pany Growth or generate 46.92% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Strong
Accuracy	98.44%
Values	Daily Returns

Small Pany Growth  vs.  Small Company Stock Fund

Small Pany Growth

Risk-Adjusted Performance

27 of 100

Strong

Compared to the overall equity markets, risk-adjusted returns on investments in Small Pany Growth are ranked lower than 27 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak technical and fundamental indicators, Small Company showed solid returns over the last few months and may actually be approaching a breakup point.

Small-company Stock

Risk-Adjusted Performance

16 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Small Company Stock Fund are ranked lower than 16 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Small-company Stock showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Small Company and Small-company Stock

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

The idea behind Small Pany Growth and Small Company Stock 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.

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 Transaction History module to view history of all your transactions and understand their impact on performance.