Correlation Between Short-term Income and Vanguard Mid-cap

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

By analyzing existing cross correlation between Short Term Income Fund and Vanguard Mid Cap Index, you can compare the effects of market volatilities on Short-term Income and Vanguard Mid-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 Short-term Income with a short position of Vanguard Mid-cap. Check out your portfolio center. Please also check ongoing floating volatility patterns of Short-term Income and Vanguard Mid-cap.

Diversification Opportunities for Short-term Income and Vanguard Mid-cap

0.62

Correlation Coefficient

Short-term Income  Vanguard Mid-cap

Poor diversification

The 3 months correlation between Short-term and Vanguard is 0.62. Overlapping area represents the amount of risk that can be diversified away by holding Short Term Income Fund and Vanguard Mid Cap Index in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Vanguard Mid Cap and Short-term Income 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 Short Term Income Fund are associated (or correlated) with Vanguard Mid-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 Mid Cap has no effect on the direction of Short-term Income i.e., Short-term Income and Vanguard Mid-cap go up and down completely randomly.

Pair Corralation between Short-term Income and Vanguard Mid-cap

Assuming the 90 days horizon Short-term Income is expected to generate 2.59 times less return on investment than Vanguard Mid-cap. But when comparing it to its historical volatility, Short Term Income Fund is 7.89 times less risky than Vanguard Mid-cap. It trades about 0.18 of its potential returns per unit of risk. Vanguard Mid Cap Index is currently generating about 0.06 of returns per unit of risk over similar time horizon. If you would invest  5,713  in Vanguard Mid Cap Index on October 4, 2024 and sell it today you would earn a total of  1,504  from holding Vanguard Mid Cap Index or generate 26.33% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	42.83%
Values	Daily Returns

Short Term Income Fund  vs.  Vanguard Mid Cap Index

Short Term Income

Risk-Adjusted Performance

0 of 100

Very Weak

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

Vanguard Mid Cap

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Vanguard Mid Cap Index has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong forward indicators, Vanguard Mid-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 Short-term Income and Vanguard Mid-cap

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

The idea behind Short Term Income Fund and Vanguard Mid 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 Volatility Analysis module to get historical volatility and risk analysis based on latest market data.