Correlation Between Vanguard Small and Inspire SmallMid

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

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

Diversification Opportunities for Vanguard Small and Inspire SmallMid

0.92

Correlation Coefficient

Vanguard Small  Inspire SmallMid

Almost no diversification

The 3 months correlation between Vanguard and Inspire is 0.92. Overlapping area represents the amount of risk that can be diversified away by holding Vanguard Small Cap Index and Inspire SmallMid Cap in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Inspire SmallMid Cap and Vanguard Small 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 Vanguard Small Cap Index are associated (or correlated) with Inspire SmallMid. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Inspire SmallMid Cap has no effect on the direction of Vanguard Small i.e., Vanguard Small and Inspire SmallMid go up and down completely randomly.

Pair Corralation between Vanguard Small and Inspire SmallMid

Allowing for the 90-day total investment horizon Vanguard Small Cap Index is expected to generate 1.02 times more return on investment than Inspire SmallMid. However, Vanguard Small is 1.02 times more volatile than Inspire SmallMid Cap. It trades about -0.33 of its potential returns per unit of risk. Inspire SmallMid Cap is currently generating about -0.36 per unit of risk. If you would invest  25,896  in Vanguard Small Cap Index on October 3, 2024 and sell it today you would lose (1,887) from holding Vanguard Small Cap Index or give up 7.29% of portfolio value over 90 days.

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

Vanguard Small Cap Index  vs.  Inspire SmallMid Cap

Vanguard Small Cap

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard Small Cap Index are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. Despite somewhat strong fundamental drivers, Vanguard Small is not utilizing all of its potentials. The recent stock price disturbance, may contribute to short-term losses for the investors.

Inspire SmallMid Cap

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Inspire SmallMid Cap are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound primary indicators, Inspire SmallMid is not utilizing all of its potentials. The newest stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with Vanguard Small and Inspire SmallMid

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

The idea behind Vanguard Small Cap Index and Inspire SmallMid Cap 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 Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.