Correlation Between Vanguard Small-cap and Inverse Dow

Can any of the company-specific risk be diversified away by investing in both Vanguard Small-cap and Inverse Dow 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 Inverse Dow 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 Inverse Dow 2x, you can compare the effects of market volatilities on Vanguard Small-cap and Inverse Dow 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 Inverse Dow. Check out your portfolio center. Please also check ongoing floating volatility patterns of Vanguard Small-cap and Inverse Dow.

Diversification Opportunities for Vanguard Small-cap and Inverse Dow

-0.79

Correlation Coefficient

Vanguard Small-cap  Inverse Dow

Pay attention - limited upside

The 3 months correlation between Vanguard and Inverse is -0.79. Overlapping area represents the amount of risk that can be diversified away by holding Vanguard Small Cap Value and Inverse Dow 2x in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Inverse Dow 2x 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 Inverse Dow. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Inverse Dow 2x has no effect on the direction of Vanguard Small-cap i.e., Vanguard Small-cap and Inverse Dow go up and down completely randomly.

Pair Corralation between Vanguard Small-cap and Inverse Dow

Assuming the 90 days horizon Vanguard Small Cap Value is expected to under-perform the Inverse Dow. But the mutual fund apears to be less risky and, when comparing its historical volatility, Vanguard Small Cap Value is 1.71 times less risky than Inverse Dow. The mutual fund trades about -0.08 of its potential returns per unit of risk. The Inverse Dow 2x is currently generating about 0.06 of returns per unit of risk over similar time horizon. If you would invest  13,930  in Inverse Dow 2x on December 21, 2024 and sell it today you would earn a total of  748.00  from holding Inverse Dow 2x or generate 5.37% return on investment over 90 days.

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

Vanguard Small Cap Value  vs.  Inverse Dow 2x

Vanguard Small Cap

Risk-Adjusted Performance

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-cap is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Inverse Dow 2x

Risk-Adjusted Performance

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Inverse Dow 2x are ranked lower than 4 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Inverse Dow may actually be approaching a critical reversion point that can send shares even higher in April 2025.

Pair Trading with Vanguard Small-cap and Inverse Dow

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

The idea behind Vanguard Small Cap Value and Inverse Dow 2x 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.