Correlation Between Vanguard Total and Royce Micro-cap

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

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

Diversification Opportunities for Vanguard Total and Royce Micro-cap

0.92

Correlation Coefficient

Vanguard Total  Royce Micro-cap

Almost no diversification

The 3 months correlation between Vanguard and Royce is 0.92. Overlapping area represents the amount of risk that can be diversified away by holding Vanguard Total Stock and Royce Micro Cap Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Royce Micro Cap and Vanguard Total 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 Total Stock are associated (or correlated) with Royce Micro-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 Micro Cap has no effect on the direction of Vanguard Total i.e., Vanguard Total and Royce Micro-cap go up and down completely randomly.

Pair Corralation between Vanguard Total and Royce Micro-cap

Assuming the 90 days horizon Vanguard Total is expected to generate 1.37 times less return on investment than Royce Micro-cap. But when comparing it to its historical volatility, Vanguard Total Stock is 1.87 times less risky than Royce Micro-cap. It trades about 0.23 of its potential returns per unit of risk. Royce Micro Cap Fund is currently generating about 0.17 of returns per unit of risk over similar time horizon. If you would invest  1,101  in Royce Micro Cap Fund on September 5, 2024 and sell it today you would earn a total of  168.00  from holding Royce Micro Cap Fund or generate 15.26% return on investment over 90 days.

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

Vanguard Total Stock  vs.  Royce Micro Cap Fund

Vanguard Total Stock

Risk-Adjusted Performance

18 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard Total Stock are ranked lower than 18 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Vanguard Total may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Royce Micro Cap

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Royce Micro Cap Fund are ranked lower than 13 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak technical and fundamental indicators, Royce Micro-cap showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Vanguard Total and Royce Micro-cap

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

The idea behind Vanguard Total Stock and Royce Micro Cap 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 Portfolio Analyzer module to portfolio analysis module that provides access to portfolio diagnostics and optimization engine.