Correlation Between Vanguard Small and The Fairholme

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

Diversification Opportunities for Vanguard Small and The Fairholme

0.89

Correlation Coefficient

Vanguard Small  The Fairholme

Very poor diversification

The 3 months correlation between Vanguard and The is 0.89. Overlapping area represents the amount of risk that can be diversified away by holding Vanguard Small Cap Index and The Fairholme Focused in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Fairholme Focused and Vanguard Small 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 The Fairholme. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Fairholme Focused has no effect on the direction of Vanguard Small i.e., Vanguard Small and The Fairholme go up and down completely randomly.

Pair Corralation between Vanguard Small and The Fairholme

Assuming the 90 days horizon Vanguard Small is expected to generate 1.38 times less return on investment than The Fairholme. In addition to that, Vanguard Small is 1.95 times more volatile than The Fairholme Focused. It trades about 0.07 of its total potential returns per unit of risk. The Fairholme Focused is currently generating about 0.18 per unit of volatility. If you would invest  1,307  in The Fairholme Focused on October 10, 2024 and sell it today you would earn a total of  82.00  from holding The Fairholme Focused or generate 6.27% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	98.39%
Values	Daily Returns

Vanguard Small Cap Index  vs.  The Fairholme Focused

Vanguard Small Cap

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard Small Cap Index are ranked lower than 5 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Vanguard Small is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Fairholme Focused

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in The Fairholme Focused are ranked lower than 13 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong forward indicators, The Fairholme 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 and The Fairholme

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

The idea behind Vanguard Small Cap Index and The Fairholme Focused 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 Investing Opportunities module to build portfolios using our predefined set of ideas and optimize them against your investing preferences.