Correlation Between World Energy and Vanguard Small

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

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

Diversification Opportunities for World Energy and Vanguard Small

0.9

Correlation Coefficient

World Energy  Vanguard Small

Almost no diversification

The 3 months correlation between World and Vanguard is 0.9. Overlapping area represents the amount of risk that can be diversified away by holding World Energy Fund 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 World Energy 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 World Energy Fund 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 World Energy i.e., World Energy and Vanguard Small go up and down completely randomly.

Pair Corralation between World Energy and Vanguard Small

Assuming the 90 days horizon World Energy Fund is expected to generate 1.12 times more return on investment than Vanguard Small. However, World Energy is 1.12 times more volatile than Vanguard Small Cap Index. It trades about 0.08 of its potential returns per unit of risk. Vanguard Small Cap Index is currently generating about 0.03 per unit of risk. If you would invest  1,357  in World Energy Fund on September 30, 2024 and sell it today you would earn a total of  82.00  from holding World Energy Fund or generate 6.04% return on investment over 90 days.

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

World Energy Fund  vs.  Vanguard Small Cap Index

World Energy

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in World Energy Fund are ranked lower than 6 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong technical and fundamental indicators, World Energy 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

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard Small Cap Index are ranked lower than 2 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Vanguard Small is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with World Energy and Vanguard Small

The main advantage of trading using opposite World Energy and Vanguard Small positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if World Energy 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 World Energy Fund 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 Idea Breakdown module to analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes.