Correlation Between Principal Value and Vanguard Mid

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

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

Diversification Opportunities for Principal Value and Vanguard Mid

No risk reduction

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

Pair Corralation between Principal Value and Vanguard Mid

Allowing for the 90-day total investment horizon Principal Value is expected to generate 2.74 times less return on investment than Vanguard Mid. But when comparing it to its historical volatility, Principal Value ETF is 1.17 times less risky than Vanguard Mid. It trades about 0.02 of its potential returns per unit of risk. Vanguard Mid Cap Index is currently generating about 0.04 of returns per unit of risk over similar time horizon. If you would invest  20,569  in Vanguard Mid Cap Index on September 5, 2023 and sell it today you would earn a total of  1,616  from holding Vanguard Mid Cap Index or generate 7.86% return on investment over 90 days.

Principal Value ETF  vs.  Vanguard Mid-Cap Index

Principal Value ETF

Principal Performance

3 of 100

Compared to the overall equity markets, risk-adjusted returns on investments in Principal Value ETF are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. In spite of fairly strong basic indicators, Principal Value is not utilizing all of its potentials. The newest stock price disturbance, may contribute to short-term losses for the investors.

Vanguard Mid-Cap Index

Vanguard Performance

2 of 100

Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard Mid Cap Index are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy basic indicators, Vanguard Mid is not utilizing all of its potentials. The newest stock price disarray, may contribute to short-term losses for the insiders.

Pair Trading with Principal Value and Vanguard Mid

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

The idea behind Principal Value ETF and Vanguard Mid 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 Equity Valuation module to check real value of public entities based on technical and fundamental data.