Correlation Between Vanguard Financials and Small Cap

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

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

Diversification Opportunities for Vanguard Financials and Small Cap

0.95

Correlation Coefficient

Vanguard Financials  Small Cap

Almost no diversification

The 3 months correlation between Vanguard and Small is 0.95. Overlapping area represents the amount of risk that can be diversified away by holding Vanguard Financials Index and Small Cap Value in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Cap Value and Vanguard Financials 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 Financials Index are associated (or correlated) with Small Cap. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Small Cap Value has no effect on the direction of Vanguard Financials i.e., Vanguard Financials and Small Cap go up and down completely randomly.

Pair Corralation between Vanguard Financials and Small Cap

Assuming the 90 days horizon Vanguard Financials Index is expected to generate 0.94 times more return on investment than Small Cap. However, Vanguard Financials Index is 1.06 times less risky than Small Cap. It trades about 0.14 of its potential returns per unit of risk. Small Cap Value is currently generating about 0.1 per unit of risk. If you would invest  5,703  in Vanguard Financials Index on September 13, 2024 and sell it today you would earn a total of  447.00  from holding Vanguard Financials Index or generate 7.84% return on investment over 90 days.

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

Vanguard Financials Index  vs.  Small Cap Value

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 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.

Small Cap Value

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Small Cap Value are ranked lower than 9 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Small Cap may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Vanguard Financials and Small Cap

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

The idea behind Vanguard Financials Index and Small Cap Value 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 Aroon Oscillator module to analyze current equity momentum using Aroon Oscillator and other momentum ratios.