Correlation Between Mid Capitalization and Vanguard Health

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

By analyzing existing cross correlation between Mid Capitalization Portfolio and Vanguard Health Care, you can compare the effects of market volatilities on Mid Capitalization and Vanguard Health 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 Mid Capitalization with a short position of Vanguard Health. Check out your portfolio center. Please also check ongoing floating volatility patterns of Mid Capitalization and Vanguard Health.

Diversification Opportunities for Mid Capitalization and Vanguard Health

0.21

Correlation Coefficient

Mid Capitalization  Vanguard Health

Modest diversification

The 3 months correlation between Mid and Vanguard is 0.21. Overlapping area represents the amount of risk that can be diversified away by holding Mid Capitalization Portfolio and Vanguard Health Care in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Vanguard Health Care and Mid Capitalization 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 Mid Capitalization Portfolio are associated (or correlated) with Vanguard Health. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Vanguard Health Care has no effect on the direction of Mid Capitalization i.e., Mid Capitalization and Vanguard Health go up and down completely randomly.

Pair Corralation between Mid Capitalization and Vanguard Health

Assuming the 90 days horizon Mid Capitalization Portfolio is expected to under-perform the Vanguard Health. In addition to that, Mid Capitalization is 1.33 times more volatile than Vanguard Health Care. It trades about -0.08 of its total potential returns per unit of risk. Vanguard Health Care is currently generating about 0.03 per unit of volatility. If you would invest  18,206  in Vanguard Health Care on December 28, 2024 and sell it today you would earn a total of  287.00  from holding Vanguard Health Care or generate 1.58% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	98.36%
Values	Daily Returns

Mid Capitalization Portfolio  vs.  Vanguard Health Care

Mid Capitalization

Risk-Adjusted Performance

Very Weak

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

Vanguard Health Care

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard Health Care are ranked lower than 2 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong fundamental indicators, Vanguard Health is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Mid Capitalization and Vanguard Health

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

The idea behind Mid Capitalization Portfolio and Vanguard Health Care 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 Portfolio Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.