Correlation Between Small Capitalization and Vanguard Explorer

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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

0.95
  Correlation Coefficient

Almost no diversification

The 3 months correlation between Small and Vanguard is 0.95. 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 Fund 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 Fund 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 generate 1.41 times more return on investment than Vanguard Explorer. However, Small Capitalization is 1.41 times more volatile than Vanguard Explorer Fund. It trades about 0.1 of its potential returns per unit of risk. Vanguard Explorer Fund is currently generating about 0.12 per unit of risk. If you would invest  607.00  in Small Capitalization Portfolio on November 29, 2023 and sell it today you would earn a total of  19.00  from holding Small Capitalization Portfolio or generate 3.13% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthVery Strong
Accuracy100.0%
ValuesDaily Returns

SMALL CAPITALIZATION PORTFOLIO  vs.  VANGUARD EXPLORER FUND

 Performance 
       Timeline  
Small Capitalization 

Risk-Adjusted Performance

15 of 100

 
Low
 
High
Good
Compared to the overall equity markets, risk-adjusted returns on investments in Small Capitalization Portfolio are ranked lower than 15 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Small Capitalization showed solid returns over the last few months and may actually be approaching a breakup point.
Vanguard Explorer Fund 

Risk-Adjusted Performance

15 of 100

 
Low
 
High
Good
Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard Explorer Fund are ranked lower than 15 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Vanguard Explorer showed solid returns over the last few months and may actually be approaching a breakup point.

Small Capitalization and Vanguard Explorer Volatility Contrast

   Predicted Return Density   
       Returns  

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 Risk-Return Analysis module to view associations between returns expected from investment and the risk you assume.

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