Correlation Between SP Small-Cap and Western Asset

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

By analyzing existing cross correlation between SP Small-Cap 600 and Western Asset Investment, you can compare the effects of market volatilities on SP Small-Cap and Western Asset 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 SP Small-Cap with a short position of Western Asset. Check out your portfolio center. Please also check ongoing floating volatility patterns of SP Small-Cap and Western Asset.

Diversification Opportunities for SP Small-Cap and Western Asset

0.78

Correlation Coefficient

SP Small-Cap  Western Asset

Poor diversification

The 3 months correlation between SML and Western is 0.78. Overlapping area represents the amount of risk that can be diversified away by holding SP Small-Cap 600 and Western Asset Investment in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Western Asset Investment and SP Small-Cap 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 SP Small-Cap 600 are associated (or correlated) with Western Asset. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Western Asset Investment has no effect on the direction of SP Small-Cap i.e., SP Small-Cap and Western Asset go up and down completely randomly.

Pair Corralation between SP Small-Cap and Western Asset

Assuming the 90 days trading horizon SP Small-Cap 600 is expected to generate 3.17 times more return on investment than Western Asset. However, SP Small-Cap is 3.17 times more volatile than Western Asset Investment. It trades about 0.09 of its potential returns per unit of risk. Western Asset Investment is currently generating about 0.13 per unit of risk. If you would invest  131,499  in SP Small-Cap 600 on May 18, 2025 and sell it today you would earn a total of  7,960  from holding SP Small-Cap 600 or generate 6.05% return on investment over 90 days.

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

SP Small-Cap 600  vs.  Western Asset Investment

Pair Trading with SP Small-Cap and Western Asset

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

The idea behind SP Small-Cap 600 and Western Asset Investment 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 Options Analysis module to analyze and evaluate options and option chains as a potential hedge for your portfolios.