Correlation Between Small Capitalization and Vanguard Explorer

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

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

Diversification Opportunities for Small Capitalization and Vanguard Explorer

0.98

Correlation Coefficient

Small Capitalization  Vanguard Explorer

Almost no diversification

The 3 months correlation between Small and Vanguard is 0.98. Overlapping area represents the amount of risk that can be diversified away by holding Small Capitalization Portfolio and Vanguard Explorer Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Vanguard Explorer and Small Capitalization 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 Small Capitalization Portfolio are associated (or correlated) with Vanguard Explorer. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Vanguard Explorer has no effect on the direction of Small Capitalization i.e., Small Capitalization and Vanguard Explorer go up and down completely randomly.

Pair Corralation between Small Capitalization and Vanguard Explorer

Assuming the 90 days horizon Small Capitalization Portfolio is expected to under-perform the Vanguard Explorer. In addition to that, Small Capitalization is 1.08 times more volatile than Vanguard Explorer Fund. It trades about -0.17 of its total potential returns per unit of risk. Vanguard Explorer Fund is currently generating about -0.17 per unit of volatility. If you would invest  11,695  in Vanguard Explorer Fund on January 26, 2024 and sell it today you would lose (424.00) from holding Vanguard Explorer Fund or give up 3.63% of portfolio value over 90 days.

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

Small Capitalization Portfolio  vs.  Vanguard Explorer Fund

Small Capitalization

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Small Capitalization Portfolio are ranked lower than 4 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Small Capitalization is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Vanguard Explorer

Risk-Adjusted Performance

3 of 100

Insignificant

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

Pair Trading with Small Capitalization and Vanguard Explorer

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

The idea behind Small Capitalization Portfolio and Vanguard Explorer Fund 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 Technical Analysis module to check basic technical indicators and analysis based on most latest market data.