Correlation Between Smallcap World and Vanguard Gnma

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

By analyzing existing cross correlation between Smallcap World Fund and Vanguard Gnma Fund, you can compare the effects of market volatilities on Smallcap World and Vanguard Gnma 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 Smallcap World with a short position of Vanguard Gnma. Check out your portfolio center. Please also check ongoing floating volatility patterns of Smallcap World and Vanguard Gnma.

Diversification Opportunities for Smallcap World and Vanguard Gnma

0.88

Correlation Coefficient

Smallcap World  Vanguard Gnma

Very poor diversification

The 3 months correlation between Smallcap and Vanguard is 0.88. Overlapping area represents the amount of risk that can be diversified away by holding Smallcap World Fund and Vanguard Gnma Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Vanguard Gnma and Smallcap World 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 Smallcap World Fund are associated (or correlated) with Vanguard Gnma. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Vanguard Gnma has no effect on the direction of Smallcap World i.e., Smallcap World and Vanguard Gnma go up and down completely randomly.

Pair Corralation between Smallcap World and Vanguard Gnma

Assuming the 90 days horizon Smallcap World Fund is expected to generate 2.58 times more return on investment than Vanguard Gnma. However, Smallcap World is 2.58 times more volatile than Vanguard Gnma Fund. It trades about 0.12 of its potential returns per unit of risk. Vanguard Gnma Fund is currently generating about 0.04 per unit of risk. If you would invest  6,898  in Smallcap World Fund on October 27, 2024 and sell it today you would earn a total of  134.00  from holding Smallcap World Fund or generate 1.94% return on investment over 90 days.

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

Smallcap World Fund  vs.  Vanguard Gnma Fund

Smallcap World

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Smallcap World Fund are ranked lower than 1 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong technical and fundamental indicators, Smallcap World is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Vanguard Gnma

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with Smallcap World and Vanguard Gnma

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

The idea behind Smallcap World Fund and Vanguard Gnma Fund 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 My Watchlist Analysis module to analyze my current watchlist and to refresh optimization strategy. Macroaxis watchlist is based on self-learning algorithm to remember stocks you like.