Correlation Between Nasdaq-100 Index and Small Cap

Can any of the company-specific risk be diversified away by investing in both Nasdaq-100 Index 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 Nasdaq-100 Index and Small Cap into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Nasdaq 100 Index Fund and Small Cap Index, you can compare the effects of market volatilities on Nasdaq-100 Index 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 Nasdaq-100 Index with a short position of Small Cap. Check out your portfolio center. Please also check ongoing floating volatility patterns of Nasdaq-100 Index and Small Cap.

Diversification Opportunities for Nasdaq-100 Index and Small Cap

0.97

Correlation Coefficient

Nasdaq-100 Index  Small Cap

Almost no diversification

The 3 months correlation between Nasdaq-100 and Small is 0.97. Overlapping area represents the amount of risk that can be diversified away by holding Nasdaq 100 Index 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 Nasdaq-100 Index 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 Nasdaq 100 Index 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 Nasdaq-100 Index i.e., Nasdaq-100 Index and Small Cap go up and down completely randomly.

Pair Corralation between Nasdaq-100 Index and Small Cap

Assuming the 90 days horizon Nasdaq 100 Index Fund is expected to generate 0.78 times more return on investment than Small Cap. However, Nasdaq 100 Index Fund is 1.29 times less risky than Small Cap. It trades about 0.29 of its potential returns per unit of risk. Small Cap Index is currently generating about 0.15 per unit of risk. If you would invest  2,171  in Nasdaq 100 Index Fund on May 2, 2025 and sell it today you would earn a total of  352.00  from holding Nasdaq 100 Index Fund or generate 16.21% return on investment over 90 days.

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

Nasdaq 100 Index Fund  vs.  Small Cap Index

Nasdaq 100 Index

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Nasdaq 100 Index Fund are ranked lower than 22 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak forward indicators, Nasdaq-100 Index showed solid returns over the last few months and may actually be approaching a breakup point.

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 12 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak essential indicators, Small Cap may actually be approaching a critical reversion point that can send shares even higher in August 2025.

Pair Trading with Nasdaq-100 Index and Small Cap

The main advantage of trading using opposite Nasdaq-100 Index and Small Cap positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Nasdaq-100 Index 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 Nasdaq 100 Index 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 Odds Of Bankruptcy module to get analysis of equity chance of financial distress in the next 2 years.