Correlation Between Financial Industries and Vanguard Financials

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

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

Diversification Opportunities for Financial Industries and Vanguard Financials

0.8

Correlation Coefficient

Financial Industries  Vanguard Financials

Very poor diversification

The 3 months correlation between Financial and Vanguard is 0.8. Overlapping area represents the amount of risk that can be diversified away by holding Financial Industries Fund and Vanguard Financials Index in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Vanguard Financials Index and Financial Industries 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 Financial Industries Fund are associated (or correlated) with Vanguard Financials. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Vanguard Financials Index has no effect on the direction of Financial Industries i.e., Financial Industries and Vanguard Financials go up and down completely randomly.

Pair Corralation between Financial Industries and Vanguard Financials

Assuming the 90 days horizon Financial Industries Fund is expected to under-perform the Vanguard Financials. In addition to that, Financial Industries is 1.82 times more volatile than Vanguard Financials Index. It trades about -0.3 of its total potential returns per unit of risk. Vanguard Financials Index is currently generating about -0.15 per unit of volatility. If you would invest  6,134  in Vanguard Financials Index on October 9, 2024 and sell it today you would lose (212.00) from holding Vanguard Financials Index or give up 3.46% of portfolio value over 90 days.

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

Financial Industries Fund  vs.  Vanguard Financials Index

Financial Industries

Risk-Adjusted Performance

0 of 100

Very Weak

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

Vanguard Financials Index

Risk-Adjusted Performance

6 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard Financials Index are ranked lower than 6 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak forward indicators, Vanguard Financials may actually be approaching a critical reversion point that can send shares even higher in February 2025.

Pair Trading with Financial Industries and Vanguard Financials

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

The idea behind Financial Industries Fund and Vanguard Financials 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.

Check out your portfolio center.

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 Earnings Calls module to check upcoming earnings announcements updated hourly across public exchanges.