Correlation Between Select Equity and Small Cap

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

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

Diversification Opportunities for Select Equity and Small Cap

0.83

Correlation Coefficient

Select Equity  Small Cap

Very poor diversification

The 3 months correlation between Select and Small is 0.83. Overlapping area represents the amount of risk that can be diversified away by holding Select Equity Fund and Small Cap Stock in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Cap Stock and Select Equity 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 Select Equity Fund are associated (or correlated) with Small Cap. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Small Cap Stock has no effect on the direction of Select Equity i.e., Select Equity and Small Cap go up and down completely randomly.

Pair Corralation between Select Equity and Small Cap

Assuming the 90 days horizon Select Equity Fund is expected to under-perform the Small Cap. In addition to that, Select Equity is 3.68 times more volatile than Small Cap Stock. It trades about -0.21 of its total potential returns per unit of risk. Small Cap Stock is currently generating about -0.42 per unit of volatility. If you would invest  1,529  in Small Cap Stock on September 30, 2024 and sell it today you would lose (201.00) from holding Small Cap Stock or give up 13.15% of portfolio value over 90 days.

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

Select Equity Fund  vs.  Small Cap Stock

Select Equity

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Select Equity Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of weak performance in the last few months, the Fund's basic indicators remain fairly strong which may send shares a bit higher in January 2025. The current disturbance may also be a sign of long term up-swing for the fund investors.

Small Cap Stock

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Small Cap Stock 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.

Pair Trading with Select Equity and Small Cap

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

The idea behind Select Equity Fund and Small Cap Stock 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 Stock Screener module to find equities using a custom stock filter or screen asymmetry in trading patterns, price, volume, or investment outlook..