Correlation Between Vanguard Large and FlexShares Quality

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

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

Diversification Opportunities for Vanguard Large and FlexShares Quality

1.0

Correlation Coefficient

Vanguard Large  FlexShares Quality

No risk reduction

The 3 months correlation between Vanguard and FlexShares is 1.0. Overlapping area represents the amount of risk that can be diversified away by holding Vanguard Large Cap Index and FlexShares Quality Large in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on FlexShares Quality Large and Vanguard Large 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 Large Cap Index are associated (or correlated) with FlexShares Quality. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of FlexShares Quality Large has no effect on the direction of Vanguard Large i.e., Vanguard Large and FlexShares Quality go up and down completely randomly.

Pair Corralation between Vanguard Large and FlexShares Quality

Allowing for the 90-day total investment horizon Vanguard Large Cap Index is expected to generate 1.01 times more return on investment than FlexShares Quality. However, Vanguard Large is 1.01 times more volatile than FlexShares Quality Large. It trades about 0.18 of its potential returns per unit of risk. FlexShares Quality Large is currently generating about 0.17 per unit of risk. If you would invest  25,757  in Vanguard Large Cap Index on September 17, 2024 and sell it today you would earn a total of  2,097  from holding Vanguard Large Cap Index or generate 8.14% return on investment over 90 days.

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

Vanguard Large Cap Index  vs.  FlexShares Quality Large

Vanguard Large Cap

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard Large Cap Index are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. In spite of fairly unfluctuating basic indicators, Vanguard Large may actually be approaching a critical reversion point that can send shares even higher in January 2025.

FlexShares Quality Large

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in FlexShares Quality Large are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady essential indicators, FlexShares Quality may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Vanguard Large and FlexShares Quality

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

The idea behind Vanguard Large Cap Index and FlexShares Quality 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.

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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 Correlation Analysis module to reduce portfolio risk simply by holding instruments which are not perfectly correlated.