Correlation Between Vanguard Large and Vanguard Small

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Can any of the company-specific risk be diversified away by investing in both Vanguard Large and Vanguard Small 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 Large and Vanguard Small into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Vanguard Large Cap Index and Vanguard Small Cap Value, you can compare the effects of market volatilities on Vanguard Large and Vanguard Small 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 Large with a short position of Vanguard Small. Check out your portfolio center. Please also check ongoing floating volatility patterns of Vanguard Large and Vanguard Small.

Diversification Opportunities for Vanguard Large and Vanguard Small

0.38
  Correlation Coefficient

Weak diversification

The 3 months correlation between Vanguard and Vanguard is 0.38. Overlapping area represents the amount of risk that can be diversified away by holding Vanguard Large Cap Index and Vanguard Small Cap Value in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Vanguard Small Cap and Vanguard Large 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 Large Cap Index are associated (or correlated) with Vanguard Small. 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 Large i.e., Vanguard Large and Vanguard Small go up and down completely randomly.

Pair Corralation between Vanguard Large and Vanguard Small

Allowing for the 90-day total investment horizon Vanguard Large is expected to generate 1.96 times less return on investment than Vanguard Small. But when comparing it to its historical volatility, Vanguard Large Cap Index is 1.66 times less risky than Vanguard Small. It trades about 0.17 of its potential returns per unit of risk. Vanguard Small Cap Value is currently generating about 0.2 of returns per unit of risk over similar time horizon. If you would invest  18,358  in Vanguard Small Cap Value on April 23, 2024 and sell it today you would earn a total of  801.00  from holding Vanguard Small Cap Value or generate 4.36% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthVery Weak
Accuracy100.0%
ValuesDaily Returns

Vanguard Large Cap Index  vs.  Vanguard Small Cap Value

 Performance 
       Timeline  
Vanguard Large Cap 

Risk-Adjusted Performance

19 of 100

 
Weak
 
Strong
Solid
Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard Large Cap Index are ranked lower than 19 (%) of all global equities and portfolios over the last 90 days. In spite of fairly fragile basic indicators, Vanguard Large may actually be approaching a critical reversion point that can send shares even higher in August 2024.
Vanguard Small Cap 

Risk-Adjusted Performance

8 of 100

 
Weak
 
Strong
OK
Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard Small Cap Value are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. Even with relatively unsteady fundamental drivers, Vanguard Small may actually be approaching a critical reversion point that can send shares even higher in August 2024.

Vanguard Large and Vanguard Small Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Vanguard Large and Vanguard Small

The main advantage of trading using opposite Vanguard Large and Vanguard Small positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Vanguard Large position performs unexpectedly, Vanguard Small 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 will offset losses from the drop in Vanguard Small's long position.
The idea behind Vanguard Large Cap Index and Vanguard Small Cap Value 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 Portfolio Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.

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