Correlation Between Vanguard Materials and Vanguard Energy

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

By analyzing existing cross correlation between Vanguard Materials Index and Vanguard Energy Fund, you can compare the effects of market volatilities on Vanguard Materials and Vanguard Energy 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 Materials with a short position of Vanguard Energy. Check out your portfolio center. Please also check ongoing floating volatility patterns of Vanguard Materials and Vanguard Energy.

Diversification Opportunities for Vanguard Materials and Vanguard Energy

0.68

Correlation Coefficient

Vanguard Materials  Vanguard Energy

Poor diversification

The 3 months correlation between Vanguard and Vanguard is 0.68. Overlapping area represents the amount of risk that can be diversified away by holding Vanguard Materials Index and Vanguard Energy Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Vanguard Energy and Vanguard Materials 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 Materials Index are associated (or correlated) with Vanguard Energy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Vanguard Energy has no effect on the direction of Vanguard Materials i.e., Vanguard Materials and Vanguard Energy go up and down completely randomly.

Pair Corralation between Vanguard Materials and Vanguard Energy

Assuming the 90 days horizon Vanguard Materials Index is expected to generate 1.27 times more return on investment than Vanguard Energy. However, Vanguard Materials is 1.27 times more volatile than Vanguard Energy Fund. It trades about 0.14 of its potential returns per unit of risk. Vanguard Energy Fund is currently generating about 0.08 per unit of risk. If you would invest  10,068  in Vanguard Materials Index on September 5, 2024 and sell it today you would earn a total of  708.00  from holding Vanguard Materials Index or generate 7.03% return on investment over 90 days.

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

Vanguard Materials Index  vs.  Vanguard Energy Fund

Vanguard Materials Index

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard Materials Index are ranked lower than 10 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Vanguard Materials may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Vanguard Energy

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard Energy Fund are ranked lower than 6 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Vanguard Energy 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 Materials and Vanguard Energy

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

The idea behind Vanguard Materials Index and Vanguard Energy 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 Pair Correlation module to compare performance and examine fundamental relationship between any two equity instruments.