Correlation Between Sp Smallcap and Sp 500

Can any of the company-specific risk be diversified away by investing in both Sp Smallcap and Sp 500 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 Smallcap and Sp 500 into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Sp Smallcap Index and Sp 500 Index, you can compare the effects of market volatilities on Sp Smallcap and Sp 500 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 Smallcap with a short position of Sp 500. Check out your portfolio center. Please also check ongoing floating volatility patterns of Sp Smallcap and Sp 500.

Diversification Opportunities for Sp Smallcap and Sp 500

0.91

Correlation Coefficient

Sp Smallcap  Sp 500

Almost no diversification

The 3 months correlation between SMLKX and SPXKX is 0.91. Overlapping area represents the amount of risk that can be diversified away by holding Sp Smallcap Index and Sp 500 Index in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Sp 500 Index and Sp Smallcap 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 Smallcap Index are associated (or correlated) with Sp 500. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Sp 500 Index has no effect on the direction of Sp Smallcap i.e., Sp Smallcap and Sp 500 go up and down completely randomly.

Pair Corralation between Sp Smallcap and Sp 500

Assuming the 90 days horizon Sp Smallcap is expected to generate 1.58 times less return on investment than Sp 500. In addition to that, Sp Smallcap is 1.52 times more volatile than Sp 500 Index. It trades about 0.1 of its total potential returns per unit of risk. Sp 500 Index is currently generating about 0.24 per unit of volatility. If you would invest  7,081  in Sp 500 Index on May 9, 2025 and sell it today you would earn a total of  843.00  from holding Sp 500 Index or generate 11.91% return on investment over 90 days.

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

Sp Smallcap Index  vs.  Sp 500 Index

Sp Smallcap Index

Risk-Adjusted Performance

Fair

Compared to the overall equity markets, risk-adjusted returns on investments in Sp Smallcap Index are ranked lower than 8 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak forward-looking signals, Sp Smallcap may actually be approaching a critical reversion point that can send shares even higher in September 2025.

Sp 500 Index

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Sp 500 Index are ranked lower than 19 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak forward-looking signals, Sp 500 may actually be approaching a critical reversion point that can send shares even higher in September 2025.

Pair Trading with Sp Smallcap and Sp 500

The main advantage of trading using opposite Sp Smallcap and Sp 500 positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Sp Smallcap position performs unexpectedly, Sp 500 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 Sp 500 will offset losses from the drop in Sp 500's long position.

The idea behind Sp Smallcap Index and Sp 500 Index 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 Theme Ratings module to determine theme ratings based on digital equity recommendations. Macroaxis theme ratings are based on combination of fundamental analysis and risk-adjusted market performance.