Correlation Between Small Cap and Vanguard Emerging

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

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

Diversification Opportunities for Small Cap and Vanguard Emerging

0.11

Correlation Coefficient

Small Cap  Vanguard Emerging

Average diversification

The 3 months correlation between Small and Vanguard is 0.11. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Value Fund and Vanguard Emerging Markets in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Vanguard Emerging Markets 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 Fund are associated (or correlated) with Vanguard Emerging. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Vanguard Emerging Markets has no effect on the direction of Small Cap i.e., Small Cap and Vanguard Emerging go up and down completely randomly.

Pair Corralation between Small Cap and Vanguard Emerging

Assuming the 90 days horizon Small Cap Value Fund is expected to under-perform the Vanguard Emerging. In addition to that, Small Cap is 7.36 times more volatile than Vanguard Emerging Markets. It trades about -0.19 of its total potential returns per unit of risk. Vanguard Emerging Markets is currently generating about 0.16 per unit of volatility. If you would invest  1,010  in Vanguard Emerging Markets on September 19, 2024 and sell it today you would earn a total of  7.00  from holding Vanguard Emerging Markets or generate 0.69% return on investment over 90 days.

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

Small Cap Value Fund  vs.  Vanguard Emerging Markets

Small Cap Value

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Small Cap Value Fund has generated negative risk-adjusted returns adding no value to fund investors. 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.

Vanguard Emerging Markets

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Vanguard Emerging Markets has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong fundamental drivers, Vanguard Emerging 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 Emerging

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

The idea behind Small Cap Value Fund and Vanguard Emerging Markets 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 Fundamental Analysis module to view fundamental data based on most recent published financial statements.