Correlation Between Small Cap and Vanguard Market

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

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

Diversification Opportunities for Small Cap and Vanguard Market

0.33

Correlation Coefficient

Small Cap  Vanguard Market

Weak diversification

The 3 months correlation between Small and Vanguard is 0.33. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Value and Vanguard Market Neutral in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Vanguard Market Neutral 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 Value are associated (or correlated) with Vanguard Market. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Vanguard Market Neutral has no effect on the direction of Small Cap i.e., Small Cap and Vanguard Market go up and down completely randomly.

Pair Corralation between Small Cap and Vanguard Market

Assuming the 90 days horizon Small Cap Value is expected to generate 2.24 times more return on investment than Vanguard Market. However, Small Cap is 2.24 times more volatile than Vanguard Market Neutral. It trades about 0.3 of its potential returns per unit of risk. Vanguard Market Neutral is currently generating about 0.12 per unit of risk. If you would invest  1,036  in Small Cap Value on October 24, 2024 and sell it today you would earn a total of  54.00  from holding Small Cap Value or generate 5.21% return on investment over 90 days.

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

Small Cap Value  vs.  Vanguard Market Neutral

Small Cap Value

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Small Cap Value has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong forward indicators, Small Cap is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Vanguard Market Neutral

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Vanguard Market Neutral has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong forward indicators, Vanguard Market is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Small Cap and Vanguard Market

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

The idea behind Small Cap Value and Vanguard Market Neutral 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 Center module to all portfolio management and optimization tools to improve performance of your portfolios.