Correlation Between Stock Index and Small Cap

Can any of the company-specific risk be diversified away by investing in both Stock 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 Stock 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 Stock Index Fund and Small Cap Special, you can compare the effects of market volatilities on Stock 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 Stock Index with a short position of Small Cap. Check out your portfolio center. Please also check ongoing floating volatility patterns of Stock Index and Small Cap.

Diversification Opportunities for Stock Index and Small Cap

0.76

Correlation Coefficient

Stock Index  Small Cap

Poor diversification

The 3 months correlation between Stock and Small is 0.76. Overlapping area represents the amount of risk that can be diversified away by holding Stock Index Fund and Small Cap Special in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Cap Special and Stock 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 Stock 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 Special has no effect on the direction of Stock Index i.e., Stock Index and Small Cap go up and down completely randomly.

Pair Corralation between Stock Index and Small Cap

Assuming the 90 days horizon Stock Index Fund is expected to generate 0.63 times more return on investment than Small Cap. However, Stock Index Fund is 1.59 times less risky than Small Cap. It trades about 0.25 of its potential returns per unit of risk. Small Cap Special is currently generating about 0.04 per unit of risk. If you would invest  5,585  in Stock Index Fund on May 9, 2025 and sell it today you would earn a total of  691.00  from holding Stock Index Fund or generate 12.37% return on investment over 90 days.

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

Stock Index Fund  vs.  Small Cap Special

Stock Index Fund

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Stock Index Fund are ranked lower than 19 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak forward indicators, Stock Index may actually be approaching a critical reversion point that can send shares even higher in September 2025.

Small Cap Special

Risk-Adjusted Performance

Soft

Compared to the overall equity markets, risk-adjusted returns on investments in Small Cap Special are ranked lower than 3 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Small Cap is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Stock Index and Small Cap

The main advantage of trading using opposite Stock Index and Small Cap positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Stock 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 Stock Index Fund and Small Cap Special 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 Transaction History module to view history of all your transactions and understand their impact on performance.