Correlation Between Sp 500 and Sp Smallcap

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

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

Diversification Opportunities for Sp 500 and Sp Smallcap

0.96

Correlation Coefficient

Sp 500  Sp Smallcap

Almost no diversification

The 3 months correlation between SPFIX and SMLKX is 0.96. Overlapping area represents the amount of risk that can be diversified away by holding Sp 500 Index and Sp Smallcap Index in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Sp Smallcap Index and Sp 500 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 500 Index are associated (or correlated) with Sp Smallcap. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Sp Smallcap Index has no effect on the direction of Sp 500 i.e., Sp 500 and Sp Smallcap go up and down completely randomly.

Pair Corralation between Sp 500 and Sp Smallcap

Assuming the 90 days horizon Sp 500 Index is expected to generate 0.63 times more return on investment than Sp Smallcap. However, Sp 500 Index is 1.58 times less risky than Sp Smallcap. It trades about 0.31 of its potential returns per unit of risk. Sp Smallcap Index is currently generating about 0.18 per unit of risk. If you would invest  6,983  in Sp 500 Index on April 30, 2025 and sell it today you would earn a total of  1,043  from holding Sp 500 Index or generate 14.94% return on investment over 90 days.

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

Sp 500 Index  vs.  Sp Smallcap Index

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 24 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak forward indicators, Sp 500 showed solid returns over the last few months and may actually be approaching a breakup point.

Sp Smallcap Index

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Sp Smallcap Index are ranked lower than 13 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak forward-looking signals, Sp Smallcap showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Sp 500 and Sp Smallcap

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

The idea behind Sp 500 Index and Sp Smallcap 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 Technical Analysis module to check basic technical indicators and analysis based on most latest market data.