Correlation Between Asset Allocation and Small Cap

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

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

Diversification Opportunities for Asset Allocation and Small Cap

0.0

Correlation Coefficient

Asset Allocation  Small Cap

Pay attention - limited upside

The 3 months correlation between Asset and Small is 0.0. Overlapping area represents the amount of risk that can be diversified away by holding Asset Allocation 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 Asset Allocation 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 Asset Allocation 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 Asset Allocation i.e., Asset Allocation and Small Cap go up and down completely randomly.

Pair Corralation between Asset Allocation and Small Cap

If you would invest  1,246  in Asset Allocation Fund on August 26, 2025 and sell it today you would earn a total of  17.00  from holding Asset Allocation Fund or generate 1.36% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Flat
Strength	Insignificant
Accuracy	0.0%
Values	Daily Returns

Asset Allocation Fund  vs.  Small Cap Index

Asset Allocation

Risk-Adjusted Performance

Soft

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

Small Cap Index

Risk-Adjusted Performance

Soft

Over the last 90 days Small Cap Index has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong essential 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 Asset Allocation and Small Cap

The main advantage of trading using opposite Asset Allocation and Small Cap positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Asset Allocation 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 Asset Allocation 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 Fundamentals Comparison module to compare fundamentals across multiple equities to find investing opportunities.