Correlation Between Vanguard Financials and Regional Bank

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

Diversification Opportunities for Vanguard Financials and Regional Bank

0.33

Correlation Coefficient

Vanguard Financials  Regional Bank

Weak diversification

The 3 months correlation between Vanguard and Regional is 0.33. Overlapping area represents the amount of risk that can be diversified away by holding Vanguard Financials Index and Regional Bank Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Regional Bank 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 Regional Bank. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Regional Bank has no effect on the direction of Vanguard Financials i.e., Vanguard Financials and Regional Bank go up and down completely randomly.

Pair Corralation between Vanguard Financials and Regional Bank

Assuming the 90 days horizon Vanguard Financials Index is expected to generate 0.59 times more return on investment than Regional Bank. However, Vanguard Financials Index is 1.7 times less risky than Regional Bank. It trades about 0.11 of its potential returns per unit of risk. Regional Bank Fund is currently generating about 0.06 per unit of risk. If you would invest  4,855  in Vanguard Financials Index on December 2, 2024 and sell it today you would earn a total of  1,467  from holding Vanguard Financials Index or generate 30.22% return on investment over 90 days.

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

Vanguard Financials Index  vs.  Regional Bank Fund

Vanguard Financials Index

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard Financials Index are ranked lower than 2 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong forward indicators, Vanguard Financials is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Regional Bank

Risk-Adjusted Performance

Very Weak

Over the last 90 days Regional Bank 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 April 2025. The current disturbance may also be a sign of long term up-swing for the fund investors.

Pair Trading with Vanguard Financials and Regional Bank

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

The idea behind Vanguard Financials Index and Regional Bank 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 Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.