Correlation Between Medium Duration and Small Cap

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

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

Diversification Opportunities for Medium Duration and Small Cap

0.0

Correlation Coefficient

Medium Duration  Small Cap

Pay attention - limited upside

The 3 months correlation between Medium and Small is 0.0. Overlapping area represents the amount of risk that can be diversified away by holding Medium Duration Bond Investor and Small Cap Equity in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Cap Equity and Medium Duration 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 Medium Duration Bond Investor 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 Equity has no effect on the direction of Medium Duration i.e., Medium Duration and Small Cap go up and down completely randomly.

Pair Corralation between Medium Duration and Small Cap

If you would invest (100.00) in Small Cap Equity on May 3, 2025 and sell it today you would earn a total of  100.00  from holding Small Cap Equity or generate -100.0% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Flat
Strength	Insignificant
Accuracy	100.0%
Values	Daily Returns

Medium Duration Bond Investor  vs.  Small Cap Equity

Medium Duration Bond

Risk-Adjusted Performance

OK

Over the last 90 days Medium Duration Bond Investor has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, Medium Duration is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Small Cap Equity

Risk-Adjusted Performance

OK

Over the last 90 days Small Cap Equity has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, Small Cap is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Medium Duration and Small Cap

The main advantage of trading using opposite Medium Duration and Small Cap positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Medium Duration 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 Medium Duration Bond Investor and Small Cap Equity 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 Dashboard module to portfolio dashboard that provides centralized access to all your investments.