Correlation Between Asset Allocation and Small Cap

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

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

Diversification Opportunities for Asset Allocation and Small Cap

0.98

Correlation Coefficient

Asset Allocation  Small Cap

Almost no diversification

The 3 months correlation between Asset and Small is 0.98. Overlapping area represents the amount of risk that can be diversified away by holding Asset Allocation Fund and Small Cap Index in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Cap Index and Asset Allocation 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 Asset Allocation Fund 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 Index has no effect on the direction of Asset Allocation i.e., Asset Allocation and Small Cap go up and down completely randomly.

Pair Corralation between Asset Allocation and Small Cap

Assuming the 90 days horizon Asset Allocation is expected to generate 1.45 times less return on investment than Small Cap. But when comparing it to its historical volatility, Asset Allocation Fund is 2.36 times less risky than Small Cap. It trades about 0.31 of its potential returns per unit of risk. Small Cap Index is currently generating about 0.19 of returns per unit of risk over similar time horizon. If you would invest  1,391  in Small Cap Index on May 1, 2025 and sell it today you would earn a total of  191.00  from holding Small Cap Index 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

Asset Allocation Fund  vs.  Small Cap Index

Asset Allocation

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Asset Allocation Fund are ranked lower than 24 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Asset Allocation may actually be approaching a critical reversion point that can send shares even higher in August 2025.

Small Cap Index

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Small Cap Index are ranked lower than 14 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak essential indicators, Small Cap showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Asset Allocation and Small Cap

The main advantage of trading using opposite Asset Allocation and Small Cap positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Asset Allocation 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 Asset Allocation Fund and Small Cap 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 Insider Screener module to find insiders across different sectors to evaluate their impact on performance.