Correlation Between Enhanced and Small Cap

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

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

Diversification Opportunities for Enhanced and Small Cap

0.96

Correlation Coefficient

Enhanced  Small Cap

Almost no diversification

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

Pair Corralation between Enhanced and Small Cap

Assuming the 90 days horizon Enhanced Large Pany is expected to generate 0.6 times more return on investment than Small Cap. However, Enhanced Large Pany is 1.66 times less risky than Small Cap. It trades about 0.2 of its potential returns per unit of risk. Small Cap Stock is currently generating about 0.11 per unit of risk. If you would invest  1,495  in Enhanced Large Pany on May 19, 2025 and sell it today you would earn a total of  129.00  from holding Enhanced Large Pany or generate 8.63% return on investment over 90 days.

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

Enhanced Large Pany  vs.  Small Cap Stock

Enhanced Large Pany

Risk-Adjusted Performance

Good

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

Small Cap Stock

Risk-Adjusted Performance

Fair

Compared to the overall equity markets, risk-adjusted returns on investments in Small Cap Stock are ranked lower than 8 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak fundamental indicators, Small Cap may actually be approaching a critical reversion point that can send shares even higher in September 2025.

Pair Trading with Enhanced and Small Cap

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

The idea behind Enhanced Large Pany and Small Cap Stock 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 Premium Stories module to follow Macroaxis premium stories from verified contributors across different equity types, categories and coverage scope.