Correlation Between Vanguard Small and US Treasury

Can any of the company-specific risk be diversified away by investing in both Vanguard Small and US Treasury 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 US Treasury 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 US Treasury 20, you can compare the effects of market volatilities on Vanguard Small and US Treasury 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 US Treasury. Check out your portfolio center. Please also check ongoing floating volatility patterns of Vanguard Small and US Treasury.

Diversification Opportunities for Vanguard Small and US Treasury

0.34

Correlation Coefficient

Vanguard Small  US Treasury

Weak diversification

The 3 months correlation between Vanguard and UTWY is 0.34. Overlapping area represents the amount of risk that can be diversified away by holding Vanguard Small Cap Index and US Treasury 20 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on US Treasury 20 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 US Treasury. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of US Treasury 20 has no effect on the direction of Vanguard Small i.e., Vanguard Small and US Treasury go up and down completely randomly.

Pair Corralation between Vanguard Small and US Treasury

Allowing for the 90-day total investment horizon Vanguard Small Cap Index is expected to generate 1.55 times more return on investment than US Treasury. However, Vanguard Small is 1.55 times more volatile than US Treasury 20. It trades about 0.18 of its potential returns per unit of risk. US Treasury 20 is currently generating about -0.03 per unit of risk. If you would invest  24,190  in Vanguard Small Cap Index on October 22, 2024 and sell it today you would earn a total of  662.00  from holding Vanguard Small Cap Index or generate 2.74% return on investment over 90 days.

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

Vanguard Small Cap Index  vs.  US Treasury 20

Vanguard Small Cap

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard Small Cap Index are ranked lower than 5 (%) 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.

US Treasury 20

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days US Treasury 20 has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong basic indicators, US Treasury is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Vanguard Small and US Treasury

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

The idea behind Vanguard Small Cap Index and US Treasury 20 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 Equity Search module to search for actively traded equities including funds and ETFs from over 30 global markets.