Correlation Between Vanguard Small-cap and Royce Small-cap

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

Diversification Opportunities for Vanguard Small-cap and Royce Small-cap

0.96

Correlation Coefficient

Vanguard Small-cap  Royce Small-cap

Almost no diversification

The 3 months correlation between Vanguard and Royce is 0.96. Overlapping area represents the amount of risk that can be diversified away by holding Vanguard Small Cap Value 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 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 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 Small-cap i.e., Vanguard Small-cap and Royce Small-cap go up and down completely randomly.

Pair Corralation between Vanguard Small-cap and Royce Small-cap

Assuming the 90 days horizon Vanguard Small Cap Value is expected to generate 0.76 times more return on investment than Royce Small-cap. However, Vanguard Small Cap Value is 1.31 times less risky than Royce Small-cap. It trades about 0.18 of its potential returns per unit of risk. Royce Small Cap Value is currently generating about 0.13 per unit of risk. If you would invest  4,621  in Vanguard Small Cap Value on September 4, 2024 and sell it today you would earn a total of  545.00  from holding Vanguard Small Cap Value or generate 11.79% 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.  Royce Small Cap Value

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.

Royce Small Cap

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Royce Small Cap Value are ranked lower than 9 (%) 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 Small-cap and Royce Small-cap

The main advantage of trading using opposite Vanguard Small-cap and Royce Small-cap positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Vanguard Small-cap 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 Small Cap Value 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.

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 Transaction History module to view history of all your transactions and understand their impact on performance.