Correlation Between Vanguard Small-cap and Vanguard Primecap

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

By analyzing existing cross correlation between Vanguard Small Cap Index and Vanguard Primecap Fund, you can compare the effects of market volatilities on Vanguard Small-cap and Vanguard Primecap 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 Vanguard Primecap. Check out your portfolio center. Please also check ongoing floating volatility patterns of Vanguard Small-cap and Vanguard Primecap.

Diversification Opportunities for Vanguard Small-cap and Vanguard Primecap

0.73

Correlation Coefficient

Vanguard Small-cap  Vanguard Primecap

Poor diversification

The 3 months correlation between Vanguard and Vanguard is 0.73. Overlapping area represents the amount of risk that can be diversified away by holding Vanguard Small Cap Index and Vanguard Primecap Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Vanguard Primecap 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 Index are associated (or correlated) with Vanguard Primecap. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Vanguard Primecap has no effect on the direction of Vanguard Small-cap i.e., Vanguard Small-cap and Vanguard Primecap go up and down completely randomly.

Pair Corralation between Vanguard Small-cap and Vanguard Primecap

Assuming the 90 days horizon Vanguard Small Cap Index is expected to under-perform the Vanguard Primecap. But the mutual fund apears to be less risky and, when comparing its historical volatility, Vanguard Small Cap Index is 1.3 times less risky than Vanguard Primecap. The mutual fund trades about -0.14 of its potential returns per unit of risk. The Vanguard Primecap Fund is currently generating about -0.03 of returns per unit of risk over similar time horizon. If you would invest  17,530  in Vanguard Primecap Fund on November 28, 2024 and sell it today you would lose (502.00) from holding Vanguard Primecap Fund or give up 2.86% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	98.31%
Values	Daily Returns

Vanguard Small Cap Index  vs.  Vanguard Primecap Fund

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 forward indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the fund investors.

Vanguard Primecap

Risk-Adjusted Performance

Very Weak

Over the last 90 days Vanguard Primecap Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong fundamental indicators, Vanguard Primecap 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 Small-cap and Vanguard Primecap

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

The idea behind Vanguard Small Cap Index and Vanguard Primecap 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 Suggestion module to get suggestions outside of your existing asset allocation including your own model portfolios.