Correlation Between Value Equity and Smallcap

Can any of the company-specific risk be diversified away by investing in both Value Equity and Smallcap 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 Smallcap 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 Smallcap Sp 600, you can compare the effects of market volatilities on Value Equity and Smallcap 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 Smallcap. Check out your portfolio center. Please also check ongoing floating volatility patterns of Value Equity and Smallcap.

Diversification Opportunities for Value Equity and Smallcap

0.68

Correlation Coefficient

Value Equity  Smallcap

Poor diversification

The 3 months correlation between Value and Smallcap is 0.68. Overlapping area represents the amount of risk that can be diversified away by holding Value Equity Investor and Smallcap Sp 600 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Smallcap Sp 600 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 Smallcap. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Smallcap Sp 600 has no effect on the direction of Value Equity i.e., Value Equity and Smallcap go up and down completely randomly.

Pair Corralation between Value Equity and Smallcap

Assuming the 90 days horizon Value Equity Investor is expected to generate 0.7 times more return on investment than Smallcap. However, Value Equity Investor is 1.43 times less risky than Smallcap. It trades about 0.25 of its potential returns per unit of risk. Smallcap Sp 600 is currently generating about 0.16 per unit of risk. If you would invest  1,721  in Value Equity Investor on May 28, 2025 and sell it today you would earn a total of  228.00  from holding Value Equity Investor or generate 13.25% return on investment over 90 days.

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

Value Equity Investor  vs.  Smallcap Sp 600

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 20 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Value Equity showed solid returns over the last few months and may actually be approaching a breakup point.

Smallcap Sp 600

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Smallcap Sp 600 are ranked lower than 12 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak forward indicators, Smallcap may actually be approaching a critical reversion point that can send shares even higher in September 2025.

Pair Trading with Value Equity and Smallcap

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

The idea behind Value Equity Investor and Smallcap Sp 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.

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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 Portfolio Anywhere module to track or share privately all of your investments from the convenience of any device.