Correlation Between Dimensional Small and Vanguard Large

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

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

Diversification Opportunities for Dimensional Small and Vanguard Large

0.78

Correlation Coefficient

Dimensional Small  Vanguard Large

Poor diversification

The 3 months correlation between Dimensional and Vanguard is 0.78. Overlapping area represents the amount of risk that can be diversified away by holding Dimensional Small Cap and Vanguard Large Cap Index in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Vanguard Large Cap and Dimensional 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 Dimensional Small Cap are associated (or correlated) with Vanguard Large. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Vanguard Large Cap has no effect on the direction of Dimensional Small i.e., Dimensional Small and Vanguard Large go up and down completely randomly.

Pair Corralation between Dimensional Small and Vanguard Large

Given the investment horizon of 90 days Dimensional Small Cap is expected to generate 1.21 times more return on investment than Vanguard Large. However, Dimensional Small is 1.21 times more volatile than Vanguard Large Cap Index. It trades about -0.16 of its potential returns per unit of risk. Vanguard Large Cap Index is currently generating about -0.2 per unit of risk. If you would invest  6,079  in Dimensional Small Cap on February 2, 2024 and sell it today you would lose (222.00) from holding Dimensional Small Cap or give up 3.65% of portfolio value over 90 days.

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

Dimensional Small Cap  vs.  Vanguard Large Cap Index

Dimensional Small Cap

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Dimensional Small Cap are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively stable basic indicators, Dimensional Small is not utilizing all of its potentials. The current stock price uproar, may contribute to short-horizon losses for the private investors.

Vanguard Large Cap

Risk-Adjusted Performance

2 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard Large Cap Index are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. In spite of fairly stable basic indicators, Vanguard Large is not utilizing all of its potentials. The latest stock price fuss, may contribute to near-short-term losses for the sophisticated investors.

Pair Trading with Dimensional Small and Vanguard Large

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

The idea behind Dimensional Small Cap and Vanguard Large Cap Index 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 Volatility Analysis module to get historical volatility and risk analysis based on latest market data.