Correlation Between Mid Cap and Small Cap

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

By analyzing existing cross correlation between Mid Cap 15x Strategy and Small Cap Value, you can compare the effects of market volatilities on Mid Cap 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 Mid Cap with a short position of Small Cap. Check out your portfolio center. Please also check ongoing floating volatility patterns of Mid Cap and Small Cap.

Diversification Opportunities for Mid Cap and Small Cap

0.87

Correlation Coefficient

Mid Cap  Small Cap

Very poor diversification

The 3 months correlation between Mid and Small is 0.87. Overlapping area represents the amount of risk that can be diversified away by holding Mid Cap 15x Strategy and Small Cap Value in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Cap Value and Mid 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 Mid Cap 15x Strategy 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 Value has no effect on the direction of Mid Cap i.e., Mid Cap and Small Cap go up and down completely randomly.

Pair Corralation between Mid Cap and Small Cap

Assuming the 90 days horizon Mid Cap 15x Strategy is expected to generate 0.97 times more return on investment than Small Cap. However, Mid Cap 15x Strategy is 1.03 times less risky than Small Cap. It trades about 0.0 of its potential returns per unit of risk. Small Cap Value is currently generating about -0.08 per unit of risk. If you would invest  13,352  in Mid Cap 15x Strategy on September 28, 2024 and sell it today you would lose (93.00) from holding Mid Cap 15x Strategy or give up 0.7% of portfolio value over 90 days.

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

Mid Cap 15x Strategy  vs.  Small Cap Value

Mid Cap 15x

Risk-Adjusted Performance

0 of 100

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.

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.

Pair Trading with Mid Cap and Small Cap

The main advantage of trading using opposite Mid Cap and Small Cap positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Mid Cap 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 Mid Cap 15x Strategy and Small Cap Value 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 Companies Directory module to evaluate performance of over 100,000 Stocks, Funds, and ETFs against different fundamentals.