Correlation Between Vanguard Small-cap and Ultra-small Company

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

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

Diversification Opportunities for Vanguard Small-cap and Ultra-small Company

0.97

Correlation Coefficient

Vanguard Small-cap  Ultra-small Company

Almost no diversification

The 3 months correlation between Vanguard and Ultra-small is 0.97. Overlapping area represents the amount of risk that can be diversified away by holding Vanguard Small Cap Value and Ultra Small Pany Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Ultra-small Company and Vanguard Small-cap 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 Small Cap Value are associated (or correlated) with Ultra-small Company. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Ultra-small Company has no effect on the direction of Vanguard Small-cap i.e., Vanguard Small-cap and Ultra-small Company go up and down completely randomly.

Pair Corralation between Vanguard Small-cap and Ultra-small Company

Assuming the 90 days horizon Vanguard Small-cap is expected to generate 1.48 times less return on investment than Ultra-small Company. But when comparing it to its historical volatility, Vanguard Small Cap Value is 1.31 times less risky than Ultra-small Company. It trades about 0.18 of its potential returns per unit of risk. Ultra Small Pany Fund is currently generating about 0.21 of returns per unit of risk over similar time horizon. If you would invest  2,889  in Ultra Small Pany Fund on September 4, 2024 and sell it today you would earn a total of  514.00  from holding Ultra Small Pany Fund or generate 17.79% return on investment over 90 days.

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

Vanguard Small Cap Value  vs.  Ultra Small Pany Fund

Vanguard Small Cap

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard Small Cap Value are ranked lower than 14 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Vanguard Small-cap may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Ultra-small Company

Risk-Adjusted Performance

16 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Ultra Small Pany Fund are ranked lower than 16 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Ultra-small Company showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Vanguard Small-cap and Ultra-small Company

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

The idea behind Vanguard Small Cap Value and Ultra Small Pany 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 Watchlist Optimization module to optimize watchlists to build efficient portfolios or rebalance existing positions based on the mean-variance optimization algorithm.