Correlation Between Large Capitalization and Small Capitalization

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

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

Diversification Opportunities for Large Capitalization and Small Capitalization

0.94

Correlation Coefficient

Large Capitalization  Small Capitalization

Almost no diversification

The 3 months correlation between Large and Small is 0.94. Overlapping area represents the amount of risk that can be diversified away by holding Large Capitalization Growth and Small Capitalization Portfolio in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Capitalization and Large Capitalization 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 Large Capitalization Growth 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 Large Capitalization i.e., Large Capitalization and Small Capitalization go up and down completely randomly.

Pair Corralation between Large Capitalization and Small Capitalization

Assuming the 90 days horizon Large Capitalization Growth is expected to generate 0.83 times more return on investment than Small Capitalization. However, Large Capitalization Growth is 1.2 times less risky than Small Capitalization. It trades about 0.18 of its potential returns per unit of risk. Small Capitalization Portfolio is currently generating about 0.13 per unit of risk. If you would invest  2,331  in Large Capitalization Growth on May 20, 2025 and sell it today you would earn a total of  232.00  from holding Large Capitalization Growth or generate 9.95% return on investment over 90 days.

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

Large Capitalization Growth  vs.  Small Capitalization Portfolio

Large Capitalization

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Large Capitalization Growth are ranked lower than 14 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Large Capitalization may actually be approaching a critical reversion point that can send shares even higher in September 2025.

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 9 (%) 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 September 2025.

Pair Trading with Large Capitalization and Small Capitalization

The main advantage of trading using opposite Large Capitalization and Small Capitalization positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Large Capitalization 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 Large Capitalization Growth 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.

Check out your portfolio center.

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 Odds Of Bankruptcy module to get analysis of equity chance of financial distress in the next 2 years.