Correlation Between Small Cap and Mid Cap

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

By analyzing existing cross correlation between Small Cap Index and Mid Cap Strategic, you can compare the effects of market volatilities on Small Cap and Mid 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 Mid Cap. Check out your portfolio center. Please also check ongoing floating volatility patterns of Small Cap and Mid Cap.

Diversification Opportunities for Small Cap and Mid Cap

0.96

Correlation Coefficient

Small Cap  Mid Cap

Almost no diversification

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

Pair Corralation between Small Cap and Mid Cap

Assuming the 90 days horizon Small Cap Index is expected to generate 1.31 times more return on investment than Mid Cap. However, Small Cap is 1.31 times more volatile than Mid Cap Strategic. It trades about 0.1 of its potential returns per unit of risk. Mid Cap Strategic is currently generating about 0.13 per unit of risk. If you would invest  1,466  in Small Cap Index on May 14, 2025 and sell it today you would earn a total of  98.00  from holding Small Cap Index or generate 6.68% return on investment over 90 days.

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

Small Cap Index  vs.  Mid Cap Strategic

Small Cap Index

Risk-Adjusted Performance

Fair

Compared to the overall equity markets, risk-adjusted returns on investments in Small Cap Index are ranked lower than 8 (%) 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 September 2025.

Mid Cap Strategic

Risk-Adjusted Performance

Fair

Compared to the overall equity markets, risk-adjusted returns on investments in Mid Cap Strategic are ranked lower than 10 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak technical and fundamental indicators, Mid Cap may actually be approaching a critical reversion point that can send shares even higher in September 2025.

Pair Trading with Small Cap and Mid Cap

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

The idea behind Small Cap Index and Mid Cap Strategic 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 Portfolio Analyzer module to portfolio analysis module that provides access to portfolio diagnostics and optimization engine.