Correlation Between Vanguard Value and Vanguard Small-cap

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

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

Diversification Opportunities for Vanguard Value and Vanguard Small-cap

0.84

Correlation Coefficient

Vanguard Value  Vanguard Small-cap

Very poor diversification

The 3 months correlation between Vanguard and Vanguard is 0.84. Overlapping area represents the amount of risk that can be diversified away by holding Vanguard Value Index and Vanguard Small Cap Index in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Vanguard Small Cap and Vanguard Value 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 Value Index are associated (or correlated) with Vanguard Small-cap. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Vanguard Small Cap has no effect on the direction of Vanguard Value i.e., Vanguard Value and Vanguard Small-cap go up and down completely randomly.

Pair Corralation between Vanguard Value and Vanguard Small-cap

Assuming the 90 days horizon Vanguard Value is expected to generate 1.27 times less return on investment than Vanguard Small-cap. But when comparing it to its historical volatility, Vanguard Value Index is 1.67 times less risky than Vanguard Small-cap. It trades about 0.38 of its potential returns per unit of risk. Vanguard Small Cap Index is currently generating about 0.29 of returns per unit of risk over similar time horizon. If you would invest  10,247  in Vanguard Small Cap Index on February 15, 2024 and sell it today you would earn a total of  543.00  from holding Vanguard Small Cap Index or generate 5.3% return on investment over 90 days.

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

Vanguard Value Index  vs.  Vanguard Small Cap Index

Vanguard Value Index

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard Value Index are ranked lower than 12 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Vanguard Value is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Vanguard Small Cap

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard Small Cap Index are ranked lower than 5 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong forward indicators, Vanguard Small-cap is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Vanguard Value and Vanguard Small-cap

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

The idea behind Vanguard Value Index and Vanguard Small Cap Index 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 Price Exposure Probability module to analyze equity upside and downside potential for a given time horizon across multiple markets.