Correlation Between Vanguard Consumer and Vanguard Financials

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

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

Diversification Opportunities for Vanguard Consumer and Vanguard Financials

0.91

Correlation Coefficient

Vanguard Consumer  Vanguard Financials

Almost no diversification

The 3 months correlation between Vanguard and VANGUARD is 0.91. Overlapping area represents the amount of risk that can be diversified away by holding Vanguard Sumer Discretionary and Vanguard Financials Index in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Vanguard Financials Index and Vanguard Consumer 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 Sumer Discretionary are associated (or correlated) with Vanguard Financials. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Vanguard Financials Index has no effect on the direction of Vanguard Consumer i.e., Vanguard Consumer and Vanguard Financials go up and down completely randomly.

Pair Corralation between Vanguard Consumer and Vanguard Financials

Assuming the 90 days horizon Vanguard Sumer Discretionary is expected to generate 0.91 times more return on investment than Vanguard Financials. However, Vanguard Sumer Discretionary is 1.1 times less risky than Vanguard Financials. It trades about 0.25 of its potential returns per unit of risk. Vanguard Financials Index is currently generating about 0.2 per unit of risk. If you would invest  16,313  in Vanguard Sumer Discretionary on August 31, 2024 and sell it today you would earn a total of  2,971  from holding Vanguard Sumer Discretionary or generate 18.21% return on investment over 90 days.

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

Vanguard Sumer Discretionary  vs.  Vanguard Financials Index

Vanguard Sumer Discr

Risk-Adjusted Performance

19 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard Sumer Discretionary are ranked lower than 19 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Vanguard Consumer showed solid returns over the last few months and may actually be approaching a breakup point.

Vanguard Financials Index

Risk-Adjusted Performance

15 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard Financials Index are ranked lower than 15 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak forward indicators, Vanguard Financials showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Vanguard Consumer and Vanguard Financials

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

The idea behind Vanguard Sumer Discretionary and Vanguard Financials Index 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 Price Ceiling Movement module to calculate and plot Price Ceiling Movement for different equity instruments.