Correlation Between Vanguard Total and Small Cap

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

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

Diversification Opportunities for Vanguard Total and Small Cap

0.81

Correlation Coefficient

Vanguard Total  Small Cap

Very poor diversification

The 3 months correlation between Vanguard and Small is 0.81. Overlapping area represents the amount of risk that can be diversified away by holding Vanguard Total World and Small Cap Core in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Cap Core and Vanguard Total 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 Total World are associated (or correlated) with 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 Small Cap Core has no effect on the direction of Vanguard Total i.e., Vanguard Total and Small Cap go up and down completely randomly.

Pair Corralation between Vanguard Total and Small Cap

Allowing for the 90-day total investment horizon Vanguard Total World is expected to generate 0.58 times more return on investment than Small Cap. However, Vanguard Total World is 1.72 times less risky than Small Cap. It trades about 0.11 of its potential returns per unit of risk. Small Cap Core is currently generating about 0.02 per unit of risk. If you would invest  10,543  in Vanguard Total World on February 12, 2024 and sell it today you would earn a total of  515.00  from holding Vanguard Total World or generate 4.88% return on investment over 90 days.

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

Vanguard Total World  vs.  Small Cap Core

Vanguard Total World

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard Total World are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively stable basic indicators, Vanguard Total is not utilizing all of its potentials. The newest stock price uproar, may contribute to short-horizon losses for the private investors.

Small Cap Core

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Small Cap Core are ranked lower than 1 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, 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 Total and Small Cap

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

The idea behind Vanguard Total World and Small Cap Core 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.