Correlation Between Smallcap Growth and Midcap Growth

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

By analyzing existing cross correlation between Smallcap Growth Fund and Midcap Growth Fund, you can compare the effects of market volatilities on Smallcap Growth and Midcap Growth 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 Smallcap Growth with a short position of Midcap Growth. Check out your portfolio center. Please also check ongoing floating volatility patterns of Smallcap Growth and Midcap Growth.

Diversification Opportunities for Smallcap Growth and Midcap Growth

0.54

Correlation Coefficient

Smallcap Growth  Midcap Growth

Very weak diversification

The 3 months correlation between Smallcap and Midcap is 0.54. Overlapping area represents the amount of risk that can be diversified away by holding Smallcap Growth Fund and Midcap Growth Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Midcap Growth and Smallcap Growth 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 Smallcap Growth Fund are associated (or correlated) with Midcap Growth. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Midcap Growth has no effect on the direction of Smallcap Growth i.e., Smallcap Growth and Midcap Growth go up and down completely randomly.

Pair Corralation between Smallcap Growth and Midcap Growth

Assuming the 90 days horizon Smallcap Growth is expected to generate 1.34 times less return on investment than Midcap Growth. In addition to that, Smallcap Growth is 1.0 times more volatile than Midcap Growth Fund. It trades about 0.2 of its total potential returns per unit of risk. Midcap Growth Fund is currently generating about 0.27 per unit of volatility. If you would invest  1,127  in Midcap Growth Fund on May 2, 2025 and sell it today you would earn a total of  203.00  from holding Midcap Growth Fund or generate 18.01% return on investment over 90 days.

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

Smallcap Growth Fund  vs.  Midcap Growth Fund

Smallcap Growth

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Smallcap Growth Fund are ranked lower than 15 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Smallcap Growth showed solid returns over the last few months and may actually be approaching a breakup point.

Midcap Growth

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Midcap Growth Fund are ranked lower than 20 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Midcap Growth showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Smallcap Growth and Midcap Growth

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

The idea behind Smallcap Growth Fund and Midcap Growth Fund 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 Holdings module to check your current holdings and cash postion to detemine if your portfolio needs rebalancing.