Correlation Between Vanguard FTSE and Vanguard Momentum

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

By analyzing existing cross correlation between Vanguard FTSE Developed and Vanguard Momentum Factor, you can compare the effects of market volatilities on Vanguard FTSE and Vanguard Momentum 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 FTSE with a short position of Vanguard Momentum. Check out your portfolio center. Please also check ongoing floating volatility patterns of Vanguard FTSE and Vanguard Momentum.

Diversification Opportunities for Vanguard FTSE and Vanguard Momentum

-0.36

Correlation Coefficient

Vanguard FTSE  Vanguard Momentum

Very good diversification

The 3 months correlation between Vanguard and Vanguard is -0.36. Overlapping area represents the amount of risk that can be diversified away by holding Vanguard FTSE Developed and Vanguard Momentum Factor in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Vanguard Momentum Factor and Vanguard FTSE 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 FTSE Developed are associated (or correlated) with Vanguard Momentum. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Vanguard Momentum Factor has no effect on the direction of Vanguard FTSE i.e., Vanguard FTSE and Vanguard Momentum go up and down completely randomly.

Pair Corralation between Vanguard FTSE and Vanguard Momentum

Considering the 90-day investment horizon Vanguard FTSE is expected to generate 2.81 times less return on investment than Vanguard Momentum. But when comparing it to its historical volatility, Vanguard FTSE Developed is 1.39 times less risky than Vanguard Momentum. It trades about 0.04 of its potential returns per unit of risk. Vanguard Momentum Factor is currently generating about 0.07 of returns per unit of risk over similar time horizon. If you would invest  11,589  in Vanguard Momentum Factor on October 7, 2024 and sell it today you would earn a total of  5,207  from holding Vanguard Momentum Factor or generate 44.93% return on investment over 90 days.

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

Vanguard FTSE Developed  vs.  Vanguard Momentum Factor

Vanguard FTSE Developed

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Vanguard FTSE Developed has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong technical and fundamental indicators, Vanguard FTSE is not utilizing all of its potentials. The recent stock price disturbance, may contribute to short-term losses for the investors.

Vanguard Momentum Factor

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard Momentum Factor are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy primary indicators, Vanguard Momentum is not utilizing all of its potentials. The current stock price disarray, may contribute to short-term losses for the investors.

Pair Trading with Vanguard FTSE and Vanguard Momentum

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

The idea behind Vanguard FTSE Developed and Vanguard Momentum Factor 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 Suggestion module to get suggestions outside of your existing asset allocation including your own model portfolios.