Correlation Between Small Cap and Sp 500

Can any of the company-specific risk be diversified away by investing in both Small Cap and Sp 500 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 Sp 500 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 Sp 500 Index, you can compare the effects of market volatilities on Small Cap and Sp 500 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 Sp 500. Check out your portfolio center. Please also check ongoing floating volatility patterns of Small Cap and Sp 500.

Diversification Opportunities for Small Cap and Sp 500

0.79

Correlation Coefficient

Small Cap  Sp 500

Poor diversification

The 3 months correlation between Small and USPRX is 0.79. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Stock and Sp 500 Index in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Sp 500 Index 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 Sp 500. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Sp 500 Index has no effect on the direction of Small Cap i.e., Small Cap and Sp 500 go up and down completely randomly.

Pair Corralation between Small Cap and Sp 500

Assuming the 90 days horizon Small Cap Stock is expected to generate 1.77 times more return on investment than Sp 500. However, Small Cap is 1.77 times more volatile than Sp 500 Index. It trades about 0.12 of its potential returns per unit of risk. Sp 500 Index is currently generating about 0.2 per unit of risk. If you would invest  1,387  in Small Cap Stock on August 31, 2024 and sell it today you would earn a total of  138.00  from holding Small Cap Stock or generate 9.95% return on investment over 90 days.

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

Small Cap Stock  vs.  Sp 500 Index

Small Cap Stock

Risk-Adjusted Performance

9 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Small Cap Stock are ranked lower than 9 (%) 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 December 2024.

Sp 500 Index

Risk-Adjusted Performance

15 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Sp 500 Index are ranked lower than 15 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Sp 500 may actually be approaching a critical reversion point that can send shares even higher in December 2024.

Pair Trading with Small Cap and Sp 500

The main advantage of trading using opposite Small Cap and Sp 500 positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Small Cap position performs unexpectedly, Sp 500 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 Sp 500 will offset losses from the drop in Sp 500's long position.

The idea behind Small Cap Stock and Sp 500 Index 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 Fundamental Analysis module to view fundamental data based on most recent published financial statements.