Correlation Between Vanguard Small and Short Duration

Can any of the company-specific risk be diversified away by investing in both Vanguard Small and Short Duration 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 and Short Duration 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 Short Duration Bond, you can compare the effects of market volatilities on Vanguard Small and Short Duration 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 with a short position of Short Duration. Check out your portfolio center. Please also check ongoing floating volatility patterns of Vanguard Small and Short Duration.

Diversification Opportunities for Vanguard Small and Short Duration

-0.09

Correlation Coefficient

Vanguard Small  Short Duration

Good diversification

The 3 months correlation between Vanguard and Short is -0.09. Overlapping area represents the amount of risk that can be diversified away by holding Vanguard Small Cap Value and Short Duration Bond in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Short Duration Bond and Vanguard Small 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 Short Duration. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Short Duration Bond has no effect on the direction of Vanguard Small i.e., Vanguard Small and Short Duration go up and down completely randomly.

Pair Corralation between Vanguard Small and Short Duration

Assuming the 90 days horizon Vanguard Small Cap Value is expected to generate 9.2 times more return on investment than Short Duration. However, Vanguard Small is 9.2 times more volatile than Short Duration Bond. It trades about 0.01 of its potential returns per unit of risk. Short Duration Bond is currently generating about -0.1 per unit of risk. If you would invest  4,817  in Vanguard Small Cap Value on September 28, 2024 and sell it today you would earn a total of  2.00  from holding Vanguard Small Cap Value or generate 0.04% return on investment over 90 days.

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

Vanguard Small Cap Value  vs.  Short Duration Bond

Vanguard Small Cap

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Vanguard Small Cap Value has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, Vanguard Small is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Short Duration Bond

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Short Duration Bond has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, Short Duration is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Vanguard Small and Short Duration

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

The idea behind Vanguard Small Cap Value and Short Duration Bond 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 Transaction History module to view history of all your transactions and understand their impact on performance.