Correlation Between Vanguard and Overlay Shares

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

By analyzing existing cross correlation between Vanguard SP 500 and Overlay Shares Large, you can compare the effects of market volatilities on Vanguard and Overlay Shares 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 with a short position of Overlay Shares. Check out your portfolio center. Please also check ongoing floating volatility patterns of Vanguard and Overlay Shares.

Diversification Opportunities for Vanguard and Overlay Shares

0.8

Correlation Coefficient

Vanguard  Overlay Shares

Very poor diversification

The 3 months correlation between Vanguard and Overlay is 0.8. Overlapping area represents the amount of risk that can be diversified away by holding Vanguard SP 500 and Overlay Shares Large in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Overlay Shares Large and Vanguard 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 SP 500 are associated (or correlated) with Overlay Shares. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Overlay Shares Large has no effect on the direction of Vanguard i.e., Vanguard and Overlay Shares go up and down completely randomly.

Pair Corralation between Vanguard and Overlay Shares

Considering the 90-day investment horizon Vanguard is expected to generate 1.16 times less return on investment than Overlay Shares. But when comparing it to its historical volatility, Vanguard SP 500 is 1.37 times less risky than Overlay Shares. It trades about 0.12 of its potential returns per unit of risk. Overlay Shares Large is currently generating about 0.1 of returns per unit of risk over similar time horizon. If you would invest  2,888  in Overlay Shares Large on December 4, 2024 and sell it today you would earn a total of  1,843  from holding Overlay Shares Large or generate 63.82% return on investment over 90 days.

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

Vanguard SP 500  vs.  Overlay Shares Large

Vanguard SP 500

Risk-Adjusted Performance

Very Weak

Over the last 90 days Vanguard SP 500 has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy basic indicators, Vanguard is not utilizing all of its potentials. The recent stock price disarray, may contribute to short-term losses for the investors.

Overlay Shares Large

Risk-Adjusted Performance

Very Weak

Over the last 90 days Overlay Shares Large has generated negative risk-adjusted returns adding no value to investors with long positions. Despite quite persistent basic indicators, Overlay Shares is not utilizing all of its potentials. The current stock price mess, may contribute to short-term losses for the institutional investors.

Pair Trading with Vanguard and Overlay Shares

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

The idea behind Vanguard SP 500 and Overlay Shares Large 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 Insider Screener module to find insiders across different sectors to evaluate their impact on performance.