Correlation Between Dimensional Core and Vanguard

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

By analyzing existing cross correlation between Dimensional Core Equity and Vanguard SP 500, you can compare the effects of market volatilities on Dimensional Core and Vanguard 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 Core with a short position of Vanguard. Check out your portfolio center. Please also check ongoing floating volatility patterns of Dimensional Core and Vanguard.

Diversification Opportunities for Dimensional Core and Vanguard

0.99

Correlation Coefficient

Dimensional Core  Vanguard

No risk reduction

The 3 months correlation between Dimensional and Vanguard is 0.99. Overlapping area represents the amount of risk that can be diversified away by holding Dimensional Core Equity and Vanguard SP 500 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Vanguard SP 500 and Dimensional Core 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 Core Equity are associated (or correlated) with Vanguard. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Vanguard SP 500 has no effect on the direction of Dimensional Core i.e., Dimensional Core and Vanguard go up and down completely randomly.

Pair Corralation between Dimensional Core and Vanguard

Given the investment horizon of 90 days Dimensional Core Equity is expected to generate 0.99 times more return on investment than Vanguard. However, Dimensional Core Equity is 1.01 times less risky than Vanguard. It trades about 0.09 of its potential returns per unit of risk. Vanguard SP 500 is currently generating about 0.09 per unit of risk. If you would invest  2,952  in Dimensional Core Equity on January 25, 2024 and sell it today you would earn a total of  121.00  from holding Dimensional Core Equity or generate 4.1% return on investment over 90 days.

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

Dimensional Core Equity  vs.  Vanguard SP 500

Dimensional Core Equity

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Dimensional Core Equity are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound basic indicators, Dimensional Core is not utilizing all of its potentials. The newest stock price tumult, may contribute to shorter-term losses for the shareholders.

Vanguard SP 500

Risk-Adjusted Performance

6 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard SP 500 are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy basic indicators, Vanguard is not utilizing all of its potentials. The recent stock price disarray, may contribute to short-term losses for the investors.

Pair Trading with Dimensional Core and Vanguard

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

The idea behind Dimensional Core Equity and Vanguard SP 500 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 Commodity Channel module to use Commodity Channel Index to analyze current equity momentum.