Correlation Between Small Cap and SPDR Russell

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Can any of the company-specific risk be diversified away by investing in both Small Cap and SPDR Russell 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 SPDR Russell into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Small Cap Core and SPDR Russell 1000, you can compare the effects of market volatilities on Small Cap and SPDR Russell 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 SPDR Russell. Check out your portfolio center. Please also check ongoing floating volatility patterns of Small Cap and SPDR Russell.

Diversification Opportunities for Small Cap and SPDR Russell

0.86
  Correlation Coefficient

Very poor diversification

The 3 months correlation between Small and SPDR is 0.86. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Core and SPDR Russell 1000 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on SPDR Russell 1000 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 Core are associated (or correlated) with SPDR Russell. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of SPDR Russell 1000 has no effect on the direction of Small Cap i.e., Small Cap and SPDR Russell go up and down completely randomly.

Pair Corralation between Small Cap and SPDR Russell

Assuming the 90 days horizon Small Cap is expected to generate 1.76 times less return on investment than SPDR Russell. In addition to that, Small Cap is 1.46 times more volatile than SPDR Russell 1000. It trades about 0.13 of its total potential returns per unit of risk. SPDR Russell 1000 is currently generating about 0.34 per unit of volatility. If you would invest  10,944  in SPDR Russell 1000 on December 29, 2023 and sell it today you would earn a total of  547.00  from holding SPDR Russell 1000 or generate 5.0% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthStrong
Accuracy95.65%
ValuesDaily Returns

Small Cap Core  vs.  SPDR Russell 1000

 Performance 
       Timeline  
Small Cap Core 

Risk-Adjusted Performance

5 of 100

 
Low
 
High
Modest
Compared to the overall equity markets, risk-adjusted returns on investments in Small Cap Core are ranked lower than 5 (%) 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.
SPDR Russell 1000 

Risk-Adjusted Performance

17 of 100

 
Low
 
High
Solid
Compared to the overall equity markets, risk-adjusted returns on investments in SPDR Russell 1000 are ranked lower than 17 (%) of all global equities and portfolios over the last 90 days. In spite of very unsteady technical and fundamental indicators, SPDR Russell may actually be approaching a critical reversion point that can send shares even higher in April 2024.

Small Cap and SPDR Russell Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Small Cap and SPDR Russell

The main advantage of trading using opposite Small Cap and SPDR Russell positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Small Cap position performs unexpectedly, SPDR Russell 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 SPDR Russell will offset losses from the drop in SPDR Russell's long position.
The idea behind Small Cap Core and SPDR Russell 1000 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.
Check out your portfolio center.
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 Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.

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