Correlation Between Mid Cap and Small Cap
Can any of the company-specific risk be diversified away by investing in both Mid Cap and Small 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 Mid Cap and Small Cap into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Mid Cap Growth and Small Cap Core, you can compare the effects of market volatilities on Mid Cap and Small 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 Mid Cap with a short position of Small Cap. Check out your portfolio center. Please also check ongoing floating volatility patterns of Mid Cap and Small Cap.
Diversification Opportunities for Mid Cap and Small Cap
Almost no diversification
The 3 months correlation between Mid and Small is 0.93. Overlapping area represents the amount of risk that can be diversified away by holding Mid Cap Growth and Small Cap Core in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Cap Core and Mid 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 Mid Cap Growth are associated (or correlated) with Small Cap. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Small Cap Core has no effect on the direction of Mid Cap i.e., Mid Cap and Small Cap go up and down completely randomly.
Pair Corralation between Mid Cap and Small Cap
Assuming the 90 days horizon Mid Cap Growth is expected to generate 0.95 times more return on investment than Small Cap. However, Mid Cap Growth is 1.05 times less risky than Small Cap. It trades about 0.2 of its potential returns per unit of risk. Small Cap Core is currently generating about 0.1 per unit of risk. If you would invest 3,700 in Mid Cap Growth on May 4, 2025 and sell it today you would earn a total of 508.00 from holding Mid Cap Growth or generate 13.73% return on investment over 90 days.
Time Period | 3 Months [change] |
Direction | Moves Together |
Strength | Very Strong |
Accuracy | 100.0% |
Values | Daily Returns |
Mid Cap Growth vs. Small Cap Core
Performance |
Timeline |
Mid Cap Growth |
Small Cap Core |
Mid Cap and Small Cap Volatility Contrast
Predicted Return Density |
Returns |
Pair Trading with Mid Cap and Small Cap
The main advantage of trading using opposite Mid Cap and Small Cap positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Mid Cap position performs unexpectedly, Small 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 Small Cap will offset losses from the drop in Small Cap's long position.The idea behind Mid Cap Growth and Small Cap Core 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.Small Cap vs. Sa Emerging Markets | Small Cap vs. Pace International Emerging | Small Cap vs. Ashmore Emerging Markets | Small Cap vs. Gmo Emerging Markets |
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 Commodity Directory module to find actively traded commodities issued by global exchanges.
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