Correlation Between Value Equity and Small Cap

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

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

Diversification Opportunities for Value Equity and Small Cap

0.92

Correlation Coefficient

Value Equity  Small Cap

Almost no diversification

The 3 months correlation between Value and Small is 0.92. Overlapping area represents the amount of risk that can be diversified away by holding Value Equity 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 Value Equity 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 Value Equity 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 Value Equity i.e., Value Equity and Small Cap go up and down completely randomly.

Pair Corralation between Value Equity and Small Cap

Assuming the 90 days horizon Value Equity Investor is expected to under-perform the Small Cap. But the mutual fund apears to be less risky and, when comparing its historical volatility, Value Equity Investor is 1.45 times less risky than Small Cap. The mutual fund trades about -0.01 of its potential returns per unit of risk. The Small Cap Equity is currently generating about 0.07 of returns per unit of risk over similar time horizon. If you would invest  1,747  in Small Cap Equity on May 2, 2025 and sell it today you would earn a total of  21.00  from holding Small Cap Equity or generate 1.2% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Strong
Accuracy	95.45%
Values	Daily Returns

Value Equity Investor  vs.  Small Cap Equity

Value Equity Investor

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Value Equity Investor are ranked lower than 16 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Value Equity may actually be approaching a critical reversion point that can send shares even higher in August 2025.

Small Cap Equity

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Small Cap Equity are ranked lower than 11 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Small Cap may actually be approaching a critical reversion point that can send shares even higher in August 2025.

Pair Trading with Value Equity and Small Cap

The main advantage of trading using opposite Value Equity and Small Cap positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Value Equity 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 Value Equity 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 Economic Indicators module to top statistical indicators that provide insights into how an economy is performing.