Correlation Between Vanguard Small-cap and Royce Micro

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

Diversification Opportunities for Vanguard Small-cap and Royce Micro

0.97

Correlation Coefficient

Vanguard Small-cap  Royce Micro

Almost no diversification

The 3 months correlation between Vanguard and Royce is 0.97. Overlapping area represents the amount of risk that can be diversified away by holding Vanguard Small Cap Index 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 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 Royce Micro. 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 Small-cap i.e., Vanguard Small-cap and Royce Micro go up and down completely randomly.

Pair Corralation between Vanguard Small-cap and Royce Micro

Assuming the 90 days horizon Vanguard Small Cap Index is expected to generate 0.82 times more return on investment than Royce Micro. However, Vanguard Small Cap Index is 1.22 times less risky than Royce Micro. It trades about -0.08 of its potential returns per unit of risk. Royce Micro Cap Fund is currently generating about -0.14 per unit of risk. If you would invest  33,876  in Vanguard Small Cap Index on December 25, 2024 and sell it today you would lose (1,919) from holding Vanguard Small Cap Index or give up 5.66% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Strong
Accuracy	98.33%
Values	Daily Returns

Vanguard Small Cap Index  vs.  Royce Micro Cap 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 fairly strong basic indicators, Vanguard Small-cap is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Royce Micro Cap

Risk-Adjusted Performance

Very Weak

Over the last 90 days Royce Micro Cap Fund 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 Small-cap and Royce Micro

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

The idea behind Vanguard Small Cap Index 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 Odds Of Bankruptcy module to get analysis of equity chance of financial distress in the next 2 years.