Correlation Between Vanguard Financials and Vanguard Communication

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

Diversification Opportunities for Vanguard Financials and Vanguard Communication

0.88

Correlation Coefficient

Vanguard Financials  Vanguard Communication

Very poor diversification

The 3 months correlation between Vanguard and Vanguard is 0.88. Overlapping area represents the amount of risk that can be diversified away by holding Vanguard Financials Index and Vanguard Communication Service in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Vanguard Communication 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 Vanguard Communication. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Vanguard Communication has no effect on the direction of Vanguard Financials i.e., Vanguard Financials and Vanguard Communication go up and down completely randomly.

Pair Corralation between Vanguard Financials and Vanguard Communication

Considering the 90-day investment horizon Vanguard Financials Index is expected to generate 0.95 times more return on investment than Vanguard Communication. However, Vanguard Financials Index is 1.05 times less risky than Vanguard Communication. It trades about 0.01 of its potential returns per unit of risk. Vanguard Communication Services is currently generating about -0.06 per unit of risk. If you would invest  11,755  in Vanguard Financials Index on December 30, 2024 and sell it today you would earn a total of  48.00  from holding Vanguard Financials Index or generate 0.41% return on investment over 90 days.

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

Vanguard Financials Index  vs.  Vanguard Communication Service

Vanguard Financials Index

Risk-Adjusted Performance

Very Weak

Over the last 90 days Vanguard Financials Index has generated negative risk-adjusted returns adding no value to investors with long positions. Despite fairly strong technical and fundamental indicators, Vanguard Financials is not utilizing all of its potentials. The newest stock price confusion, may contribute to short-horizon losses for the traders.

Vanguard Communication

Risk-Adjusted Performance

Very Weak

Over the last 90 days Vanguard Communication Services has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong basic indicators, Vanguard Communication is not utilizing all of its potentials. The newest stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Vanguard Financials and Vanguard Communication

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

The idea behind Vanguard Financials Index and Vanguard Communication Services 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 Options Analysis module to analyze and evaluate options and option chains as a potential hedge for your portfolios.