Correlation Between Smallcap World and Equity Income

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

By analyzing existing cross correlation between Smallcap World Fund and Equity Income Fund, you can compare the effects of market volatilities on Smallcap World and Equity Income 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 Smallcap World with a short position of Equity Income. Check out your portfolio center. Please also check ongoing floating volatility patterns of Smallcap World and Equity Income.

Diversification Opportunities for Smallcap World and Equity Income

0.94

Correlation Coefficient

Smallcap World  Equity Income

Almost no diversification

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

Pair Corralation between Smallcap World and Equity Income

Assuming the 90 days horizon Smallcap World Fund is expected to generate 1.22 times more return on investment than Equity Income. However, Smallcap World is 1.22 times more volatile than Equity Income Fund. It trades about 0.31 of its potential returns per unit of risk. Equity Income Fund is currently generating about 0.2 per unit of risk. If you would invest  6,432  in Smallcap World Fund on April 28, 2025 and sell it today you would earn a total of  1,019  from holding Smallcap World Fund or generate 15.84% return on investment over 90 days.

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

Smallcap World Fund  vs.  Equity Income Fund

Smallcap World

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Smallcap World Fund are ranked lower than 24 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak technical and fundamental indicators, Smallcap World showed solid returns over the last few months and may actually be approaching a breakup point.

Equity Income

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Equity Income Fund are ranked lower than 15 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Equity Income may actually be approaching a critical reversion point that can send shares even higher in August 2025.

Pair Trading with Smallcap World and Equity Income

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

The idea behind Smallcap World Fund and Equity Income 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 Sync Your Broker module to sync your existing holdings, watchlists, positions or portfolios from thousands of online brokerage services, banks, investment account aggregators and robo-advisors..