Can any of the company-specific risk be diversified away by investing in both Vanguard Small and BZDYF 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 Small and BZDYF into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Vanguard Small Cap Index and BZDYF, you can compare the effects of market volatilities on Vanguard Small and BZDYF 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 Small with a short position of BZDYF. Check out your portfolio center. Please also check ongoing floating volatility patterns of Vanguard Small and BZDYF.
Diversification Opportunities for Vanguard Small and BZDYF
The 3 months correlation between Vanguard and BZDYF is -0.45. Overlapping area represents the amount of risk that can be diversified away by holding Vanguard Small-Cap Index and BZDYF in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on BZDYF and Vanguard Small 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 Small Cap Index are associated (or correlated) with BZDYF. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of BZDYF has no effect on the direction of Vanguard Small i.e., Vanguard Small and BZDYF go up and down completely randomly.
Allowing for the 90-day total investment horizon Vanguard Small Cap Index is expected to generate 1.14 times more return on investment than BZDYF. However, Vanguard Small is 1.14 times more volatile than BZDYF. It trades about -0.24 of its potential returns per unit of risk. BZDYF is currently generating about -0.33 per unit of risk. If you would invest 19,640 in Vanguard Small Cap Index on June 27, 2023 and sell it today you would lose (830.00) from holding Vanguard Small Cap Index or give up 4.23% of portfolio value over 90 days.
Over the last 90 days Vanguard Small Cap Index has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong fundamental drivers, Vanguard Small is not utilizing all of its potentials. The newest stock price disturbance, may contribute to short-term losses for the investors.
Over the last 90 days BZDYF has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable basic indicators, BZDYF is not utilizing all of its potentials. The recent stock price disturbance, may contribute to mid-run losses for the stockholders.
The main advantage of trading using opposite Vanguard Small and BZDYF positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Vanguard Small position performs unexpectedly, BZDYF 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 BZDYF will offset losses from the drop in BZDYF's long position.
The idea behind Vanguard Small Cap Index and BZDYF 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.
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 the Transaction History module to view history of all your transactions and understand their impact on performance.
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