Correlation Between Small Cap and Large Cap

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

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

Diversification Opportunities for Small Cap and Large Cap

0.54

Correlation Coefficient

Small Cap  Large Cap

Very weak diversification

The 3 months correlation between Small and Large is 0.54. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Value Profund and Large Cap Growth Profund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Large Cap Growth and 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 Small Cap Value Profund are associated (or correlated) with Large Cap. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Large Cap Growth has no effect on the direction of Small Cap i.e., Small Cap and Large Cap go up and down completely randomly.

Pair Corralation between Small Cap and Large Cap

Assuming the 90 days horizon Small Cap is expected to generate 1.85 times less return on investment than Large Cap. In addition to that, Small Cap is 1.5 times more volatile than Large Cap Growth Profund. It trades about 0.11 of its total potential returns per unit of risk. Large Cap Growth Profund is currently generating about 0.3 per unit of volatility. If you would invest  4,353  in Large Cap Growth Profund on May 2, 2025 and sell it today you would earn a total of  731.00  from holding Large Cap Growth Profund or generate 16.79% return on investment over 90 days.

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

Small Cap Value Profund  vs.  Large Cap Growth Profund

Small Cap Value

Risk-Adjusted Performance

OK

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

Large Cap Growth

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Large Cap Growth Profund are ranked lower than 23 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak forward indicators, Large Cap showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Small Cap and Large Cap

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

The idea behind Small Cap Value Profund and Large Cap Growth 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 Headlines Timeline module to stay connected to all market stories and filter out noise. Drill down to analyze hype elasticity.