Correlation Between Vanguard Short-Term and DOW JONES

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Can any of the company-specific risk be diversified away by investing in both Vanguard Short-Term and DOW JONES 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 Short-Term and DOW JONES into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Vanguard Short-Term Bond and DOW JONES INDUSTRIAL, you can compare the effects of market volatilities on Vanguard Short-Term and DOW JONES 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 Short-Term with a short position of DOW JONES. Check out your portfolio center. Please also check ongoing floating volatility patterns of Vanguard Short-Term and DOW JONES.

Diversification Opportunities for Vanguard Short-Term and DOW JONES

0.76
  Correlation Coefficient

Poor diversification

The 3 months correlation between Vanguard and DOW JONES is 0.76. Overlapping area represents the amount of risk that can be diversified away by holding Vanguard Short-Term Bond and DOW JONES INDUSTRIAL in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on DOW JONES INDUSTRIAL and Vanguard Short-Term 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 Short-Term Bond are associated (or correlated) with DOW JONES. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of DOW JONES INDUSTRIAL has no effect on the direction of Vanguard Short-Term i.e., Vanguard Short-Term and DOW JONES go up and down completely randomly.
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Pair Corralation between Vanguard Short-Term and DOW JONES

Considering the 90-day investment horizon Vanguard Short-Term Bond is expected to under-perform the DOW JONES. But the etf apears to be less risky and, when comparing its historical volatility, Vanguard Short-Term Bond is 6.1 times less risky than DOW JONES. The etf trades about -0.06 of its potential returns per unit of risk. The DOW JONES INDUSTRIAL is currently generating about 0.02 of returns per unit of risk over similar time horizon. If you would invest  3,138,576  in DOW JONES INDUSTRIAL on October 29, 2022 and sell it today you would earn a total of  291,685  from holding DOW JONES INDUSTRIAL or generate 9.29% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthSignificant
Accuracy98.59%
ValuesDaily Returns

Vanguard Short-Term Bond  vs.  DOW JONES INDUSTRIAL

 Performance (%) 
       Timeline  

Vanguard Short-Term and DOW JONES Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Vanguard Short-Term and DOW JONES

The main advantage of trading using opposite Vanguard Short-Term and DOW JONES positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Vanguard Short-Term position performs unexpectedly, DOW JONES 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 DOW JONES will offset losses from the drop in DOW JONES's long position.
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The idea behind Vanguard Short-Term Bond and DOW JONES INDUSTRIAL 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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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 Transaction History module to view history of all your transactions and understand their impact on performance.

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