Correlation Between Fomento Economico and SP Small-Cap

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

By analyzing existing cross correlation between Fomento Economico Mexicano and SP Small-Cap 600, you can compare the effects of market volatilities on Fomento Economico and SP 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 Fomento Economico with a short position of SP Small-Cap. Check out your portfolio center. Please also check ongoing floating volatility patterns of Fomento Economico and SP Small-Cap.

Diversification Opportunities for Fomento Economico and SP Small-Cap

-0.44

Correlation Coefficient

Fomento Economico  SP Small-Cap

Very good diversification

The 3 months correlation between Fomento and SML is -0.44. Overlapping area represents the amount of risk that can be diversified away by holding Fomento Economico Mexicano and SP Small-Cap 600 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on SP Small-Cap 600 and Fomento Economico 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 Fomento Economico Mexicano are associated (or correlated) with SP 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 SP Small-Cap 600 has no effect on the direction of Fomento Economico i.e., Fomento Economico and SP Small-Cap go up and down completely randomly.

Pair Corralation between Fomento Economico and SP Small-Cap

Considering the 90-day investment horizon Fomento Economico Mexicano is expected to under-perform the SP Small-Cap. In addition to that, Fomento Economico is 1.34 times more volatile than SP Small-Cap 600. It trades about -0.09 of its total potential returns per unit of risk. SP Small-Cap 600 is currently generating about 0.11 per unit of volatility. If you would invest  124,752  in SP Small-Cap 600 on May 3, 2025 and sell it today you would earn a total of  9,758  from holding SP Small-Cap 600 or generate 7.82% return on investment over 90 days.

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

Fomento Economico Mexicano  vs.  SP Small-Cap 600

Pair Trading with Fomento Economico and SP Small-Cap

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

The idea behind Fomento Economico Mexicano and SP Small-Cap 600 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.

Check out your portfolio center.

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 Portfolio Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.