Correlation Between Energy Basic and Small Capitalization

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

By analyzing existing cross correlation between Energy Basic Materials and Small Capitalization Portfolio, you can compare the effects of market volatilities on Energy Basic and Small Capitalization 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 Energy Basic with a short position of Small Capitalization. Check out your portfolio center. Please also check ongoing floating volatility patterns of Energy Basic and Small Capitalization.

Diversification Opportunities for Energy Basic and Small Capitalization

0.76

Correlation Coefficient

Energy Basic  Small Capitalization

Poor diversification

The 3 months correlation between Energy and Small is 0.76. Overlapping area represents the amount of risk that can be diversified away by holding Energy Basic Materials and Small Capitalization Portfolio in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Capitalization and Energy Basic 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 Energy Basic Materials are associated (or correlated) with Small Capitalization. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Small Capitalization has no effect on the direction of Energy Basic i.e., Energy Basic and Small Capitalization go up and down completely randomly.

Pair Corralation between Energy Basic and Small Capitalization

Assuming the 90 days horizon Energy Basic Materials is expected to generate 0.88 times more return on investment than Small Capitalization. However, Energy Basic Materials is 1.14 times less risky than Small Capitalization. It trades about -0.08 of its potential returns per unit of risk. Small Capitalization Portfolio is currently generating about -0.08 per unit of risk. If you would invest  1,354  in Energy Basic Materials on July 24, 2025 and sell it today you would lose (27.00) from holding Energy Basic Materials or give up 1.99% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	95.65%
Values	Daily Returns

Energy Basic Materials  vs.  Small Capitalization Portfolio

Energy Basic Materials

Risk-Adjusted Performance

Weakest

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

Small Capitalization

Risk-Adjusted Performance

Fair

Compared to the overall equity markets, risk-adjusted returns on investments in Small Capitalization Portfolio are ranked lower than 7 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Small Capitalization may actually be approaching a critical reversion point that can send shares even higher in November 2025.

Pair Trading with Energy Basic and Small Capitalization

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

The idea behind Energy Basic Materials and Small Capitalization Portfolio 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 Idea Analyzer module to analyze all characteristics, volatility and risk-adjusted return of Macroaxis ideas.