Correlation Between Vanguard Financials and Health Care

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

Diversification Opportunities for Vanguard Financials and Health Care

-0.82

Correlation Coefficient

Vanguard Financials  Health Care

Pay attention - limited upside

The 3 months correlation between Vanguard and Health is -0.82. Overlapping area represents the amount of risk that can be diversified away by holding Vanguard Financials Index and Health Care Select in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Health Care Select 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 Health Care. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Health Care Select has no effect on the direction of Vanguard Financials i.e., Vanguard Financials and Health Care go up and down completely randomly.

Pair Corralation between Vanguard Financials and Health Care

Considering the 90-day investment horizon Vanguard Financials Index is expected to generate 1.74 times more return on investment than Health Care. However, Vanguard Financials is 1.74 times more volatile than Health Care Select. It trades about 0.19 of its potential returns per unit of risk. Health Care Select is currently generating about -0.13 per unit of risk. If you would invest  10,906  in Vanguard Financials Index on September 4, 2024 and sell it today you would earn a total of  1,600  from holding Vanguard Financials Index or generate 14.67% return on investment over 90 days.

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

Vanguard Financials Index  vs.  Health Care Select

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 global equities and portfolios over the last 90 days. Despite fairly uncertain technical and fundamental indicators, Vanguard Financials demonstrated solid returns over the last few months and may actually be approaching a breakup point.

Health Care Select

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Health Care Select has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly stable essential indicators, Health Care is not utilizing all of its potentials. The latest stock price fuss, may contribute to near-short-term losses for the sophisticated investors.

Pair Trading with Vanguard Financials and Health Care

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

The idea behind Vanguard Financials Index and Health Care Select 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.

Check out your portfolio center.

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 Center module to all portfolio management and optimization tools to improve performance of your portfolios.