Correlation Between Vanguard European and Vanguard Materials

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

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

Diversification Opportunities for Vanguard European and Vanguard Materials

0.62

Correlation Coefficient

Vanguard European  Vanguard Materials

Poor diversification

The 3 months correlation between Vanguard and Vanguard is 0.62. Overlapping area represents the amount of risk that can be diversified away by holding Vanguard European Stock and Vanguard Materials Index in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Vanguard Materials Index and Vanguard European 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 European Stock are associated (or correlated) with Vanguard Materials. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Vanguard Materials Index has no effect on the direction of Vanguard European i.e., Vanguard European and Vanguard Materials go up and down completely randomly.

Pair Corralation between Vanguard European and Vanguard Materials

Assuming the 90 days horizon Vanguard European Stock is expected to generate 0.79 times more return on investment than Vanguard Materials. However, Vanguard European Stock is 1.26 times less risky than Vanguard Materials. It trades about -0.22 of its potential returns per unit of risk. Vanguard Materials Index is currently generating about -0.62 per unit of risk. If you would invest  3,550  in Vanguard European Stock on October 1, 2024 and sell it today you would lose (113.00) from holding Vanguard European Stock or give up 3.18% of portfolio value over 90 days.

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

Vanguard European Stock  vs.  Vanguard Materials Index

Vanguard European Stock

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Vanguard European Stock has generated negative risk-adjusted returns adding no value to fund investors. In spite of latest weak performance, the Fund's basic indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the fund investors.

Vanguard Materials Index

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Vanguard Materials Index has generated negative risk-adjusted returns adding no value to fund investors. In spite of latest weak performance, the Fund's basic indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the fund investors.

Pair Trading with Vanguard European and Vanguard Materials

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

The idea behind Vanguard European Stock and Vanguard Materials 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 Money Flow Index module to determine momentum by analyzing Money Flow Index and other technical indicators.