Correlation Between Small Capitalization and Vanguard Equity

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

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

Diversification Opportunities for Small Capitalization and Vanguard Equity

0.23

Correlation Coefficient

Small Capitalization  Vanguard Equity

Modest diversification

The 3 months correlation between Small and Vanguard is 0.23. Overlapping area represents the amount of risk that can be diversified away by holding Small Capitalization Portfolio and Vanguard Equity Income in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Vanguard Equity Income and Small 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 Small Capitalization Portfolio are associated (or correlated) with Vanguard Equity. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Vanguard Equity Income has no effect on the direction of Small Capitalization i.e., Small Capitalization and Vanguard Equity go up and down completely randomly.

Pair Corralation between Small Capitalization and Vanguard Equity

Assuming the 90 days horizon Small Capitalization Portfolio is expected to under-perform the Vanguard Equity. In addition to that, Small Capitalization is 13.84 times more volatile than Vanguard Equity Income. It trades about -0.11 of its total potential returns per unit of risk. Vanguard Equity Income is currently generating about 0.1 per unit of volatility. If you would invest  4,448  in Vanguard Equity Income on September 13, 2024 and sell it today you would earn a total of  179.00  from holding Vanguard Equity Income or generate 4.02% return on investment over 90 days.

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

Small Capitalization Portfolio  vs.  Vanguard Equity Income

Small Capitalization

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Small Capitalization Portfolio has generated negative risk-adjusted returns adding no value to fund investors. In spite of weak performance in the last few months, the Fund's fundamental indicators remain fairly strong which may send shares a bit higher in January 2025. The current disturbance may also be a sign of long term up-swing for the fund investors.

Vanguard Equity Income

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard Equity Income are ranked lower than 8 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Vanguard Equity is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Small Capitalization and Vanguard Equity

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

The idea behind Small Capitalization Portfolio and Vanguard Equity Income 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 Alpha Finder module to use alpha and beta coefficients to find investment opportunities after accounting for the risk.