Correlation Between Small-cap Value and Vanguard Energy

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

By analyzing existing cross correlation between Small Cap Value Series and Vanguard Energy Index, you can compare the effects of market volatilities on Small-cap Value and Vanguard Energy 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 Value with a short position of Vanguard Energy. Check out your portfolio center. Please also check ongoing floating volatility patterns of Small-cap Value and Vanguard Energy.

Diversification Opportunities for Small-cap Value and Vanguard Energy

0.4

Correlation Coefficient

Small-cap Value  Vanguard Energy

Very weak diversification

The 3 months correlation between Small-cap and Vanguard is 0.4. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Value Series and Vanguard Energy Index in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Vanguard Energy Index and Small-cap Value 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 Series are associated (or correlated) with Vanguard Energy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Vanguard Energy Index has no effect on the direction of Small-cap Value i.e., Small-cap Value and Vanguard Energy go up and down completely randomly.

Pair Corralation between Small-cap Value and Vanguard Energy

Assuming the 90 days horizon Small Cap Value Series is expected to under-perform the Vanguard Energy. But the mutual fund apears to be less risky and, when comparing its historical volatility, Small Cap Value Series is 1.15 times less risky than Vanguard Energy. The mutual fund trades about -0.12 of its potential returns per unit of risk. The Vanguard Energy Index is currently generating about 0.13 of returns per unit of risk over similar time horizon. If you would invest  5,878  in Vanguard Energy Index on December 20, 2024 and sell it today you would earn a total of  588.00  from holding Vanguard Energy Index or generate 10.0% return on investment over 90 days.

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

Small Cap Value Series  vs.  Vanguard Energy Index

Small Cap Value

Risk-Adjusted Performance

Very Weak

Over the last 90 days Small Cap Value Series has generated negative risk-adjusted returns adding no value to fund investors. In spite of latest weak performance, the Fund's basic indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the fund investors.

Vanguard Energy Index

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard Energy Index are ranked lower than 10 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Vanguard Energy may actually be approaching a critical reversion point that can send shares even higher in April 2025.

Pair Trading with Small-cap Value and Vanguard Energy

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

The idea behind Small Cap Value Series and Vanguard Energy 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.

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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 Aroon Oscillator module to analyze current equity momentum using Aroon Oscillator and other momentum ratios.