Correlation Between Large Company and Small Company

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

By analyzing existing cross correlation between Large Pany Value and Small Pany Value, you can compare the effects of market volatilities on Large Company and Small Company 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 Large Company with a short position of Small Company. Check out your portfolio center. Please also check ongoing floating volatility patterns of Large Company and Small Company.

Diversification Opportunities for Large Company and Small Company

0.86

Correlation Coefficient

Large Company  Small Company

Very poor diversification

The 3 months correlation between Large and Small is 0.86. Overlapping area represents the amount of risk that can be diversified away by holding Large Pany Value and Small Pany Value in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Pany Value and Large Company 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 Large Pany Value are associated (or correlated) with Small Company. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Small Pany Value has no effect on the direction of Large Company i.e., Large Company and Small Company go up and down completely randomly.

Pair Corralation between Large Company and Small Company

Assuming the 90 days horizon Large Pany Value is expected to under-perform the Small Company. But the mutual fund apears to be less risky and, when comparing its historical volatility, Large Pany Value is 1.61 times less risky than Small Company. The mutual fund trades about -0.18 of its potential returns per unit of risk. The Small Pany Value is currently generating about -0.05 of returns per unit of risk over similar time horizon. If you would invest  2,600  in Small Pany Value on February 7, 2024 and sell it today you would lose (34.00) from holding Small Pany Value or give up 1.31% of portfolio value over 90 days.

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

Large Pany Value  vs.  Small Pany Value

Large Pany Value

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Large Pany Value are ranked lower than 8 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Large Company is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Small Pany Value

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Small Pany Value are ranked lower than 6 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Small Company is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Large Company and Small Company

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

The idea behind Large Pany Value and Small Pany Value 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 Diagnostics module to use generated alerts and portfolio events aggregator to diagnose current holdings.