Correlation Between Mid Cap and Vanguard Small

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

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

Diversification Opportunities for Mid Cap and Vanguard Small

0.97

Correlation Coefficient

Mid Cap  Vanguard Small

Almost no diversification

The 3 months correlation between Mid and Vanguard is 0.97. Overlapping area represents the amount of risk that can be diversified away by holding Mid Cap Growth and Vanguard Small Cap Growth in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Vanguard Small Cap and Mid Cap 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 Cap Growth are associated (or correlated) with Vanguard Small. 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 Mid Cap i.e., Mid Cap and Vanguard Small go up and down completely randomly.

Pair Corralation between Mid Cap and Vanguard Small

Assuming the 90 days horizon Mid Cap Growth is expected to generate 0.99 times more return on investment than Vanguard Small. However, Mid Cap Growth is 1.01 times less risky than Vanguard Small. It trades about 0.47 of its potential returns per unit of risk. Vanguard Small Cap Growth is currently generating about 0.43 per unit of risk. If you would invest  3,663  in Mid Cap Growth on September 5, 2024 and sell it today you would earn a total of  468.00  from holding Mid Cap Growth or generate 12.78% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Strong
Accuracy	95.45%
Values	Daily Returns

Mid Cap Growth  vs.  Vanguard Small Cap Growth

Mid Cap Growth

Risk-Adjusted Performance

24 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Mid Cap Growth are ranked lower than 24 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Mid Cap showed solid returns over the last few months and may actually be approaching a breakup point.

Vanguard Small Cap

Risk-Adjusted Performance

22 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard Small Cap Growth are ranked lower than 22 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak forward indicators, Vanguard Small showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Mid Cap and Vanguard Small

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

The idea behind Mid Cap Growth and Vanguard Small Cap Growth 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 Center module to all portfolio management and optimization tools to improve performance of your portfolios.