Correlation Between 3M and Vanguard World

Can any of the company-specific risk be diversified away by investing in both 3M and Vanguard World 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 3M and Vanguard World into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between 3M Company and Vanguard World, you can compare the effects of market volatilities on 3M and Vanguard World 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 3M with a short position of Vanguard World. Check out your portfolio center. Please also check ongoing floating volatility patterns of 3M and Vanguard World.

Diversification Opportunities for 3M and Vanguard World

0.09

Correlation Coefficient

3M  Vanguard World

Significant diversification

The 3 months correlation between 3M and Vanguard is 0.09. Overlapping area represents the amount of risk that can be diversified away by holding 3M Company and Vanguard World in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Vanguard World and 3M 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 3M Company are associated (or correlated) with Vanguard World. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Vanguard World has no effect on the direction of 3M i.e., 3M and Vanguard World go up and down completely randomly.

Pair Corralation between 3M and Vanguard World

Assuming the 90 days trading horizon 3M Company is expected to generate 2.52 times more return on investment than Vanguard World. However, 3M is 2.52 times more volatile than Vanguard World. It trades about 0.07 of its potential returns per unit of risk. Vanguard World is currently generating about 0.1 per unit of risk. If you would invest  178,562  in 3M Company on September 27, 2024 and sell it today you would earn a total of  80,438  from holding 3M Company or generate 45.05% return on investment over 90 days.

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

3M Company  vs.  Vanguard World

3M Company

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days 3M Company has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong primary indicators, 3M is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Vanguard World

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Vanguard World has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong basic indicators, Vanguard World is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with 3M and Vanguard World

The main advantage of trading using opposite 3M and Vanguard World positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if 3M position performs unexpectedly, Vanguard World 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 World will offset losses from the drop in Vanguard World's long position.

The idea behind 3M Company and Vanguard World 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.

Check out your portfolio center.

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.