Correlation Between Large Company and Small Pany

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

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

Diversification Opportunities for Large Company and Small Pany

0.96

Correlation Coefficient

Large Company  Small Pany

Almost no diversification

The 3 months correlation between Large and Small is 0.96. Overlapping area represents the amount of risk that can be diversified away by holding Large Pany Value and Small Pany Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Pany Fund and Large Company 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 Large Pany Value are associated (or correlated) with Small Pany. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Small Pany Fund has no effect on the direction of Large Company i.e., Large Company and Small Pany go up and down completely randomly.

Pair Corralation between Large Company and Small Pany

Assuming the 90 days horizon Large Company is expected to generate 1.34 times less return on investment than Small Pany. But when comparing it to its historical volatility, Large Pany Value is 1.4 times less risky than Small Pany. It trades about 0.17 of its potential returns per unit of risk. Small Pany Fund is currently generating about 0.16 of returns per unit of risk over similar time horizon. If you would invest  1,503  in Small Pany Fund on May 2, 2025 and sell it today you would earn a total of  153.00  from holding Small Pany Fund or generate 10.18% return on investment over 90 days.

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

Large Pany Value  vs.  Small Pany Fund

Large Pany Value

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Large Pany Value are ranked lower than 13 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak forward indicators, Large Company may actually be approaching a critical reversion point that can send shares even higher in August 2025.

Small Pany Fund

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Small Pany Fund are ranked lower than 12 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak forward indicators, Small Pany may actually be approaching a critical reversion point that can send shares even higher in August 2025.

Pair Trading with Large Company and Small Pany

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

The idea behind Large Pany Value and Small Pany 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 Sectors module to list of equity sectors categorizing publicly traded companies based on their primary business activities.