Correlation Between Small-cap Growth and Small-cap Value

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

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

Diversification Opportunities for Small-cap Growth and Small-cap Value

0.99

Correlation Coefficient

Small-cap Growth  Small-cap Value

No risk reduction

The 3 months correlation between Small-cap and Small-cap is 0.99. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Growth Profund 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 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 Small Cap Growth Profund are associated (or correlated) with Small-cap Value. 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 Growth i.e., Small-cap Growth and Small-cap Value go up and down completely randomly.

Pair Corralation between Small-cap Growth and Small-cap Value

Assuming the 90 days horizon Small Cap Growth Profund is expected to generate 0.84 times more return on investment than Small-cap Value. However, Small Cap Growth Profund is 1.19 times less risky than Small-cap Value. It trades about 0.26 of its potential returns per unit of risk. Small Cap Value Profund is currently generating about 0.21 per unit of risk. If you would invest  9,220  in Small Cap Growth Profund on April 20, 2025 and sell it today you would earn a total of  1,719  from holding Small Cap Growth Profund or generate 18.64% return on investment over 90 days.

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

Small Cap Growth Profund  vs.  Small Cap Value Profund

Small Cap Growth

Risk-Adjusted Performance

Solid

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

Small Cap Value

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Small Cap Value Profund are ranked lower than 16 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak forward indicators, Small-cap Value showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Small-cap Growth and Small-cap Value

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

The idea behind Small Cap Growth Profund 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 Transaction History module to view history of all your transactions and understand their impact on performance.