Correlation Between Vanguard STAR and Select Sector

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

By analyzing existing cross correlation between Vanguard STAR Funds and The Select Sector, you can compare the effects of market volatilities on Vanguard STAR and Select Sector 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 STAR with a short position of Select Sector. Check out your portfolio center. Please also check ongoing floating volatility patterns of Vanguard STAR and Select Sector.

Diversification Opportunities for Vanguard STAR and Select Sector

0.24

Correlation Coefficient

Vanguard STAR  Select Sector

Modest diversification

The 3 months correlation between Vanguard and Select is 0.24. Overlapping area represents the amount of risk that can be diversified away by holding Vanguard STAR Funds and The Select Sector in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Select Sector and Vanguard STAR 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 STAR Funds are associated (or correlated) with Select Sector. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Select Sector has no effect on the direction of Vanguard STAR i.e., Vanguard STAR and Select Sector go up and down completely randomly.

Pair Corralation between Vanguard STAR and Select Sector

Assuming the 90 days trading horizon Vanguard STAR Funds is expected to under-perform the Select Sector. But the etf apears to be less risky and, when comparing its historical volatility, Vanguard STAR Funds is 1.26 times less risky than Select Sector. The etf trades about 0.0 of its potential returns per unit of risk. The The Select Sector is currently generating about 0.08 of returns per unit of risk over similar time horizon. If you would invest  151,222  in The Select Sector on September 4, 2024 and sell it today you would earn a total of  14,958  from holding The Select Sector or generate 9.89% return on investment over 90 days.

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

Vanguard STAR Funds  vs.  The Select Sector

Vanguard STAR Funds

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Vanguard STAR Funds has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong basic indicators, Vanguard STAR is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Select Sector

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in The Select Sector are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak basic indicators, Select Sector may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Vanguard STAR and Select Sector

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

The idea behind Vanguard STAR Funds and The Select Sector 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.