Correlation Between Vanguard Explorer and Vanguard Primecap

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

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

Diversification Opportunities for Vanguard Explorer and Vanguard Primecap

0.67

Correlation Coefficient

Vanguard Explorer  Vanguard Primecap

Poor diversification

The 3 months correlation between Vanguard and Vanguard is 0.67. Overlapping area represents the amount of risk that can be diversified away by holding Vanguard Explorer Fund and Vanguard Primecap Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Vanguard Primecap and Vanguard Explorer 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 Explorer Fund are associated (or correlated) with Vanguard Primecap. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Vanguard Primecap has no effect on the direction of Vanguard Explorer i.e., Vanguard Explorer and Vanguard Primecap go up and down completely randomly.

Pair Corralation between Vanguard Explorer and Vanguard Primecap

Assuming the 90 days horizon Vanguard Explorer Fund is expected to under-perform the Vanguard Primecap. But the mutual fund apears to be less risky and, when comparing its historical volatility, Vanguard Explorer Fund is 1.0 times less risky than Vanguard Primecap. The mutual fund trades about -0.19 of its potential returns per unit of risk. The Vanguard Primecap Fund is currently generating about -0.03 of returns per unit of risk over similar time horizon. If you would invest  17,530  in Vanguard Primecap Fund on November 29, 2024 and sell it today you would lose (502.00) from holding Vanguard Primecap Fund or give up 2.86% of portfolio value over 90 days.

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

Vanguard Explorer Fund  vs.  Vanguard Primecap Fund

Vanguard Explorer

Risk-Adjusted Performance

Very Weak

Over the last 90 days Vanguard Explorer Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of weak performance in the last few months, the Fund's basic indicators remain fairly strong which may send shares a bit higher in March 2025. The current disturbance may also be a sign of long term up-swing for the fund investors.

Vanguard Primecap

Risk-Adjusted Performance

Very Weak

Over the last 90 days Vanguard Primecap Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong fundamental indicators, Vanguard Primecap 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 Explorer and Vanguard Primecap

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

The idea behind Vanguard Explorer Fund and Vanguard Primecap Fund 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 Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.