Correlation Between Small Cap and Capital Growth

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

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

Diversification Opportunities for Small Cap and Capital Growth

0.74

Correlation Coefficient

Small Cap  Capital Growth

Poor diversification

The 3 months correlation between Small and Capital is 0.74. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Stock and Capital Growth Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Capital Growth 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 Stock are associated (or correlated) with Capital Growth. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Capital Growth has no effect on the direction of Small Cap i.e., Small Cap and Capital Growth go up and down completely randomly.

Pair Corralation between Small Cap and Capital Growth

Assuming the 90 days horizon Small Cap Stock is expected to generate 0.97 times more return on investment than Capital Growth. However, Small Cap Stock is 1.03 times less risky than Capital Growth. It trades about -0.07 of its potential returns per unit of risk. Capital Growth Fund is currently generating about -0.16 per unit of risk. If you would invest  1,451  in Small Cap Stock on September 26, 2024 and sell it today you would lose (82.00) from holding Small Cap Stock or give up 5.65% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	97.62%
Values	Daily Returns

Small Cap Stock  vs.  Capital Growth Fund

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 fairly strong fundamental indicators, Small Cap is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Capital Growth

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Capital Growth Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of latest weak performance, the Fund's technical and fundamental 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 Small Cap and Capital Growth

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

The idea behind Small Cap Stock and Capital Growth 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.

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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 Instant Ratings module to determine any equity ratings based on digital recommendations. Macroaxis instant equity ratings are based on combination of fundamental analysis and risk-adjusted market performance.