Correlation Between Vanguard Materials and Vanguard Small-cap

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

Diversification Opportunities for Vanguard Materials and Vanguard Small-cap

0.67

Correlation Coefficient

Vanguard Materials  Vanguard Small-cap

Poor diversification

The 3 months correlation between Vanguard and Vanguard is 0.67. Overlapping area represents the amount of risk that can be diversified away by holding Vanguard Materials Index and Vanguard Small Cap Index in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Vanguard Small Cap 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 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 Vanguard Small Cap has no effect on the direction of Vanguard Materials i.e., Vanguard Materials and Vanguard Small-cap go up and down completely randomly.

Pair Corralation between Vanguard Materials and Vanguard Small-cap

Assuming the 90 days horizon Vanguard Materials Index is expected to generate 0.9 times more return on investment than Vanguard Small-cap. However, Vanguard Materials Index is 1.12 times less risky than Vanguard Small-cap. It trades about 0.0 of its potential returns per unit of risk. Vanguard Small Cap Index is currently generating about -0.11 per unit of risk. If you would invest  9,571  in Vanguard Materials Index on December 31, 2024 and sell it today you would lose (31.00) from holding Vanguard Materials Index or give up 0.32% of portfolio value over 90 days.

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

Vanguard Materials Index  vs.  Vanguard Small Cap Index

Vanguard Materials Index

Risk-Adjusted Performance

Very Weak

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

Vanguard Small Cap

Risk-Adjusted Performance

Very Weak

Over the last 90 days Vanguard Small Cap Index has generated negative risk-adjusted returns adding no value to fund investors. In spite of latest weak performance, the Fund's basic indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the fund investors.

Pair Trading with Vanguard Materials and Vanguard Small-cap

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

The idea behind Vanguard Materials Index and Vanguard Small Cap Index 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 Center module to all portfolio management and optimization tools to improve performance of your portfolios.