Correlation Between Target Retirement and Vanguard Total

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

By analyzing existing cross correlation between Target Retirement 2040 and Vanguard Total Stock, you can compare the effects of market volatilities on Target Retirement and Vanguard Total 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 Target Retirement with a short position of Vanguard Total. Check out your portfolio center. Please also check ongoing floating volatility patterns of Target Retirement and Vanguard Total.

Diversification Opportunities for Target Retirement and Vanguard Total

0.3

Correlation Coefficient

Target Retirement  Vanguard Total

Weak diversification

The 3 months correlation between Target and Vanguard is 0.3. Overlapping area represents the amount of risk that can be diversified away by holding Target Retirement 2040 and Vanguard Total Stock in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Vanguard Total Stock and Target Retirement 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 Target Retirement 2040 are associated (or correlated) with Vanguard Total. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Vanguard Total Stock has no effect on the direction of Target Retirement i.e., Target Retirement and Vanguard Total go up and down completely randomly.

Pair Corralation between Target Retirement and Vanguard Total

Assuming the 90 days horizon Target Retirement is expected to generate 2.24 times less return on investment than Vanguard Total. But when comparing it to its historical volatility, Target Retirement 2040 is 1.33 times less risky than Vanguard Total. It trades about 0.06 of its potential returns per unit of risk. Vanguard Total Stock is currently generating about 0.1 of returns per unit of risk over similar time horizon. If you would invest  17,800  in Vanguard Total Stock on October 4, 2024 and sell it today you would earn a total of  8,615  from holding Vanguard Total Stock or generate 48.4% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	99.8%
Values	Daily Returns

Target Retirement 2040  vs.  Vanguard Total Stock

Target Retirement 2040

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Target Retirement 2040 has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, Target Retirement is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Vanguard Total Stock

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard Total Stock are ranked lower than 3 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Vanguard Total is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Target Retirement and Vanguard Total

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

The idea behind Target Retirement 2040 and Vanguard Total Stock 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 Global Correlations module to find global opportunities by holding instruments from different markets.