Correlation Between Small-cap Value and Small Cap

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

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

Diversification Opportunities for Small-cap Value and Small Cap

0.86

Correlation Coefficient

Small-cap Value  Small Cap

Very poor diversification

The 3 months correlation between Small-cap and Small is 0.86. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Value Series and Small Cap Value Profund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Cap Value and Small-cap Value 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 Small Cap Value Series 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 Value has no effect on the direction of Small-cap Value i.e., Small-cap Value and Small Cap go up and down completely randomly.

Pair Corralation between Small-cap Value and Small Cap

Assuming the 90 days horizon Small-cap Value is expected to generate 1.09 times less return on investment than Small Cap. But when comparing it to its historical volatility, Small Cap Value Series is 1.19 times less risky than Small Cap. It trades about 0.12 of its potential returns per unit of risk. Small Cap Value Profund is currently generating about 0.11 of returns per unit of risk over similar time horizon. If you would invest  7,258  in Small Cap Value Profund on May 7, 2025 and sell it today you would earn a total of  622.00  from holding Small Cap Value Profund or generate 8.57% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	98.39%
Values	Daily Returns

Small Cap Value Series  vs.  Small Cap Value Profund

Small Cap Value

Risk-Adjusted Performance

Fair

Compared to the overall equity markets, risk-adjusted returns on investments in Small Cap Value Series are ranked lower than 9 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak fundamental indicators, Small-cap Value may actually be approaching a critical reversion point that can send shares even higher in September 2025.

Small Cap Value

Risk-Adjusted Performance

Fair

Compared to the overall equity markets, risk-adjusted returns on investments in Small Cap Value Profund are ranked lower than 8 (%) 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 September 2025.

Pair Trading with Small-cap Value and Small Cap

The main advantage of trading using opposite Small-cap Value and Small Cap positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Small-cap Value 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 Small Cap Value Series and Small Cap Value Profund 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 Risk-Return Analysis module to view associations between returns expected from investment and the risk you assume.