Correlation Between Morningstar Defensive and Vanguard Small-cap

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

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

Diversification Opportunities for Morningstar Defensive and Vanguard Small-cap

-0.71

Correlation Coefficient

Morningstar Defensive  Vanguard Small-cap

Pay attention - limited upside

The 3 months correlation between Morningstar and Vanguard is -0.71. Overlapping area represents the amount of risk that can be diversified away by holding Morningstar Defensive Bond and Vanguard Small Cap Index in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Vanguard Small Cap and Morningstar Defensive 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 Morningstar Defensive Bond are associated (or correlated) with Vanguard Small-cap. 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 Morningstar Defensive i.e., Morningstar Defensive and Vanguard Small-cap go up and down completely randomly.

Pair Corralation between Morningstar Defensive and Vanguard Small-cap

Assuming the 90 days horizon Morningstar Defensive Bond is expected to generate 0.12 times more return on investment than Vanguard Small-cap. However, Morningstar Defensive Bond is 8.58 times less risky than Vanguard Small-cap. It trades about 0.19 of its potential returns per unit of risk. Vanguard Small Cap Index is currently generating about -0.08 per unit of risk. If you would invest  962.00  in Morningstar Defensive Bond on December 29, 2024 and sell it today you would earn a total of  15.00  from holding Morningstar Defensive Bond or generate 1.56% return on investment over 90 days.

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

Morningstar Defensive Bond  vs.  Vanguard Small Cap Index

Morningstar Defensive

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Morningstar Defensive Bond are ranked lower than 15 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong fundamental drivers, Morningstar Defensive 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

Very Weak

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

Pair Trading with Morningstar Defensive and Vanguard Small-cap

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

The idea behind Morningstar Defensive Bond and Vanguard Small Cap 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 Balance Of Power module to check stock momentum by analyzing Balance Of Power indicator and other technical ratios.