Correlation Between Small Cap and Inverse Russell

Can any of the company-specific risk be diversified away by investing in both Small Cap and Inverse Russell 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 Inverse Russell 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 Inverse Russell 2000, you can compare the effects of market volatilities on Small Cap and Inverse Russell 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 Inverse Russell. Check out your portfolio center. Please also check ongoing floating volatility patterns of Small Cap and Inverse Russell.

Diversification Opportunities for Small Cap and Inverse Russell

-0.94

Correlation Coefficient

Small Cap  Inverse Russell

Pay attention - limited upside

The 3 months correlation between Small and Inverse is -0.94. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Stock and Inverse Russell 2000 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Inverse Russell 2000 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 Inverse Russell. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Inverse Russell 2000 has no effect on the direction of Small Cap i.e., Small Cap and Inverse Russell go up and down completely randomly.

Pair Corralation between Small Cap and Inverse Russell

Assuming the 90 days horizon Small Cap Stock is expected to generate 0.96 times more return on investment than Inverse Russell. However, Small Cap Stock is 1.04 times less risky than Inverse Russell. It trades about 0.05 of its potential returns per unit of risk. Inverse Russell 2000 is currently generating about -0.04 per unit of risk. If you would invest  1,299  in Small Cap Stock on September 13, 2024 and sell it today you would earn a total of  198.00  from holding Small Cap Stock or generate 15.24% return on investment over 90 days.

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

Small Cap Stock  vs.  Inverse Russell 2000

Small Cap Stock

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Small Cap Stock are ranked lower than 7 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Small Cap may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Inverse Russell 2000

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Inverse Russell 2000 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 Inverse Russell

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

The idea behind Small Cap Stock and Inverse Russell 2000 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 Commodity Channel module to use Commodity Channel Index to analyze current equity momentum.