Correlation Between Small Cap and Vanguard Small

Can any of the company-specific risk be diversified away by investing in both Small Cap and Vanguard Small 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 Small 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 Small Cap Value, you can compare the effects of market volatilities on Small Cap and Vanguard Small 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 Small. Check out your portfolio center. Please also check ongoing floating volatility patterns of Small Cap and Vanguard Small.

Diversification Opportunities for Small Cap and Vanguard Small

0.85

Correlation Coefficient

Small Cap  Vanguard Small

Very poor diversification

The 3 months correlation between Small and Vanguard is 0.85. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Value Fund and Vanguard Small Cap Value in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Vanguard Small Cap 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 Small. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Vanguard Small Cap has no effect on the direction of Small Cap i.e., Small Cap and Vanguard Small go up and down completely randomly.

Pair Corralation between Small Cap and Vanguard Small

Assuming the 90 days horizon Small Cap is expected to generate 1.79 times less return on investment than Vanguard Small. In addition to that, Small Cap is 1.22 times more volatile than Vanguard Small Cap Value. It trades about 0.02 of its total potential returns per unit of risk. Vanguard Small Cap Value is currently generating about 0.05 per unit of volatility. If you would invest  3,682  in Vanguard Small Cap Value on September 26, 2024 and sell it today you would earn a total of  1,120  from holding Vanguard Small Cap Value or generate 30.42% return on investment over 90 days.

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

Small Cap Value Fund  vs.  Vanguard Small Cap Value

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 Small Cap

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Vanguard Small Cap Value has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, Vanguard Small 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 Small

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

The idea behind Small Cap Value Fund and Vanguard Small Cap 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 Technical Analysis module to check basic technical indicators and analysis based on most latest market data.