Correlation Between Vanguard 500 and Royce Small-cap

Can any of the company-specific risk be diversified away by investing in both Vanguard 500 and Royce 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 500 and Royce Small-cap into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Vanguard 500 Index and Royce Small Cap Value, you can compare the effects of market volatilities on Vanguard 500 and Royce 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 500 with a short position of Royce Small-cap. Check out your portfolio center. Please also check ongoing floating volatility patterns of Vanguard 500 and Royce Small-cap.

Diversification Opportunities for Vanguard 500 and Royce Small-cap

0.84

Correlation Coefficient

Vanguard 500  Royce Small-cap

Very poor diversification

The 3 months correlation between Vanguard and Royce is 0.84. Overlapping area represents the amount of risk that can be diversified away by holding Vanguard 500 Index and Royce Small Cap Value in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Royce Small Cap and Vanguard 500 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 500 Index are associated (or correlated) with Royce 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 Royce Small Cap has no effect on the direction of Vanguard 500 i.e., Vanguard 500 and Royce Small-cap go up and down completely randomly.

Pair Corralation between Vanguard 500 and Royce Small-cap

Assuming the 90 days horizon Vanguard 500 is expected to generate 1.35 times less return on investment than Royce Small-cap. But when comparing it to its historical volatility, Vanguard 500 Index is 2.24 times less risky than Royce Small-cap. It trades about 0.38 of its potential returns per unit of risk. Royce Small Cap Value is currently generating about 0.23 of returns per unit of risk over similar time horizon. If you would invest  1,053  in Royce Small Cap Value on September 5, 2024 and sell it today you would earn a total of  88.00  from holding Royce Small Cap Value or generate 8.36% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	95.45%
Values	Daily Returns

Vanguard 500 Index  vs.  Royce Small Cap Value

Vanguard 500 Index

Risk-Adjusted Performance

17 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard 500 Index are ranked lower than 17 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Vanguard 500 may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Royce Small Cap

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Royce Small Cap Value are ranked lower than 10 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak technical and fundamental indicators, Royce Small-cap may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Vanguard 500 and Royce Small-cap

The main advantage of trading using opposite Vanguard 500 and Royce Small-cap positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Vanguard 500 position performs unexpectedly, Royce 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 Royce Small-cap will offset losses from the drop in Royce Small-cap's long position.

The idea behind Vanguard 500 Index and Royce 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 Commodity Channel module to use Commodity Channel Index to analyze current equity momentum.