Correlation Between Vanguard Energy and Vanguard Financials

Can any of the company-specific risk be diversified away by investing in both Vanguard Energy 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 Energy 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 Energy Index and Vanguard Financials Index, you can compare the effects of market volatilities on Vanguard Energy 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 Energy with a short position of Vanguard Financials. Check out your portfolio center. Please also check ongoing floating volatility patterns of Vanguard Energy and Vanguard Financials.

Diversification Opportunities for Vanguard Energy and Vanguard Financials

0.87

Correlation Coefficient

Vanguard Energy  Vanguard Financials

Very poor diversification

The 3 months correlation between Vanguard and Vanguard is 0.87. Overlapping area represents the amount of risk that can be diversified away by holding Vanguard Energy Index 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 Energy 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 Energy Index 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 Energy i.e., Vanguard Energy and Vanguard Financials go up and down completely randomly.

Pair Corralation between Vanguard Energy and Vanguard Financials

Considering the 90-day investment horizon Vanguard Energy is expected to generate 2.06 times less return on investment than Vanguard Financials. In addition to that, Vanguard Energy is 1.11 times more volatile than Vanguard Financials Index. It trades about 0.1 of its total potential returns per unit of risk. Vanguard Financials Index is currently generating about 0.24 per unit of volatility. If you would invest  10,016  in Vanguard Financials Index on September 5, 2024 and sell it today you would earn a total of  2,411  from holding Vanguard Financials Index or generate 24.07% return on investment over 90 days.

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

Vanguard Energy Index  vs.  Vanguard Financials Index

Vanguard Energy Index

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard Energy Index are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. In spite of rather inconsistent fundamental indicators, Vanguard Energy may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Vanguard Financials Index

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard Financials Index are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. Despite fairly uncertain technical and fundamental indicators, Vanguard Financials demonstrated solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Vanguard Energy and Vanguard Financials

The main advantage of trading using opposite Vanguard Energy and Vanguard Financials positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Vanguard Energy 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 Energy Index 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 Portfolio Comparator module to compare the composition, asset allocations and performance of any two portfolios in your account.