Correlation Between Vanguard Small and FlexShares Morningstar

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

Diversification Opportunities for Vanguard Small and FlexShares Morningstar

0.34

Correlation Coefficient

Vanguard Small  FlexShares Morningstar

Weak diversification

The 3 months correlation between Vanguard and FlexShares is 0.34. Overlapping area represents the amount of risk that can be diversified away by holding Vanguard Small Cap Index and FlexShares Morningstar Emergin in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on FlexShares Morningstar 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 FlexShares Morningstar. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of FlexShares Morningstar has no effect on the direction of Vanguard Small i.e., Vanguard Small and FlexShares Morningstar go up and down completely randomly.

Pair Corralation between Vanguard Small and FlexShares Morningstar

Allowing for the 90-day total investment horizon Vanguard Small Cap Index is expected to under-perform the FlexShares Morningstar. In addition to that, Vanguard Small is 1.44 times more volatile than FlexShares Morningstar Emerging. It trades about -0.03 of its total potential returns per unit of risk. FlexShares Morningstar Emerging is currently generating about 0.11 per unit of volatility. If you would invest  5,078  in FlexShares Morningstar Emerging on March 19, 2024 and sell it today you would earn a total of  220.00  from holding FlexShares Morningstar Emerging or generate 4.33% return on investment over 90 days.

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

Vanguard Small Cap Index  vs.  FlexShares Morningstar Emergin

Vanguard Small Cap

Risk-Adjusted Performance

0 of 100

Very Weak

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 latest stock price disturbance, may contribute to short-term losses for the investors.

FlexShares Morningstar

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in FlexShares Morningstar Emerging are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound basic indicators, FlexShares Morningstar is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with Vanguard Small and FlexShares Morningstar

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

The idea behind Vanguard Small Cap Index and FlexShares Morningstar Emerging 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 Sectors module to list of equity sectors categorizing publicly traded companies based on their primary business activities.