Correlation Between Vanguard Small and NYSE Composite

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Can any of the company-specific risk be diversified away by investing in both Vanguard Small and NYSE Composite 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 NYSE Composite 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 NYSE Composite, you can compare the effects of market volatilities on Vanguard Small and NYSE Composite 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 NYSE Composite. Check out your portfolio center. Please also check ongoing floating volatility patterns of Vanguard Small and NYSE Composite.

Diversification Opportunities for Vanguard Small and NYSE Composite

0.96
  Correlation Coefficient

Almost no diversification

The 3 months correlation between Vanguard and NYSE is 0.96. Overlapping area represents the amount of risk that can be diversified away by holding Vanguard Small Cap Index and NYSE Composite in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on NYSE Composite 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 NYSE Composite. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of NYSE Composite has no effect on the direction of Vanguard Small i.e., Vanguard Small and NYSE Composite go up and down completely randomly.
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Pair Corralation between Vanguard Small and NYSE Composite

Allowing for the 90-day total investment horizon Vanguard Small Cap Index is expected to generate 1.54 times more return on investment than NYSE Composite. However, Vanguard Small is 1.54 times more volatile than NYSE Composite. It trades about 0.03 of its potential returns per unit of risk. NYSE Composite is currently generating about 0.04 per unit of risk. If you would invest  19,355  in Vanguard Small Cap Index on January 17, 2024 and sell it today you would earn a total of  1,912  from holding Vanguard Small Cap Index or generate 9.88% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthVery Strong
Accuracy99.68%
ValuesDaily Returns

Vanguard Small Cap Index  vs.  NYSE Composite

 Performance 
       Timeline  

Vanguard Small and NYSE Composite Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Vanguard Small and NYSE Composite

The main advantage of trading using opposite Vanguard Small and NYSE Composite positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Vanguard Small position performs unexpectedly, NYSE Composite 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 NYSE Composite will offset losses from the drop in NYSE Composite's long position.
The idea behind Vanguard Small Cap Index and NYSE Composite 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 ETFs module to find actively traded Exchange Traded Funds (ETF) from around the world.

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