Correlation Between Vanguard Small-cap and Vanguard Mega

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

Diversification Opportunities for Vanguard Small-cap and Vanguard Mega

0.48

Correlation Coefficient

Vanguard Small-cap  Vanguard Mega

Very weak diversification

The 3 months correlation between Vanguard and Vanguard is 0.48. Overlapping area represents the amount of risk that can be diversified away by holding Vanguard Small Cap Index and Vanguard Mega Cap in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Vanguard Mega 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 Vanguard Mega. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Vanguard Mega Cap has no effect on the direction of Vanguard Small-cap i.e., Vanguard Small-cap and Vanguard Mega go up and down completely randomly.

Pair Corralation between Vanguard Small-cap and Vanguard Mega

Assuming the 90 days horizon Vanguard Small-cap is expected to generate 1.28 times less return on investment than Vanguard Mega. But when comparing it to its historical volatility, Vanguard Small Cap Index is 1.04 times less risky than Vanguard Mega. It trades about 0.08 of its potential returns per unit of risk. Vanguard Mega Cap is currently generating about 0.1 of returns per unit of risk over similar time horizon. If you would invest  64,392  in Vanguard Mega Cap on October 23, 2024 and sell it today you would earn a total of  4,498  from holding Vanguard Mega Cap or generate 6.99% return on investment over 90 days.

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

Vanguard Small Cap Index  vs.  Vanguard Mega Cap

Vanguard Small Cap

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard Small Cap Index 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 Small-cap is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Vanguard Mega Cap

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard Mega Cap are ranked lower than 8 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Vanguard Mega may actually be approaching a critical reversion point that can send shares even higher in February 2025.

Pair Trading with Vanguard Small-cap and Vanguard Mega

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

The idea behind Vanguard Small Cap Index and Vanguard Mega Cap 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 Price Transformation module to use Price Transformation models to analyze the depth of different equity instruments across global markets.