Correlation Between Vanguard Small and Vanguard Materials

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

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

Diversification Opportunities for Vanguard Small and Vanguard Materials

0.63

Correlation Coefficient

Vanguard Small  Vanguard Materials

Poor diversification

The 3 months correlation between Vanguard and Vanguard is 0.63. Overlapping area represents the amount of risk that can be diversified away by holding Vanguard Small Cap Index and Vanguard Materials Index in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Vanguard Materials Index and Vanguard Small 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 Small Cap Index are associated (or correlated) with Vanguard Materials. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Vanguard Materials Index has no effect on the direction of Vanguard Small i.e., Vanguard Small and Vanguard Materials go up and down completely randomly.

Pair Corralation between Vanguard Small and Vanguard Materials

Assuming the 90 days horizon Vanguard Small Cap Index is expected to generate 1.17 times more return on investment than Vanguard Materials. However, Vanguard Small is 1.17 times more volatile than Vanguard Materials Index. It trades about 0.17 of its potential returns per unit of risk. Vanguard Materials Index is currently generating about 0.05 per unit of risk. If you would invest  11,150  in Vanguard Small Cap Index on August 30, 2024 and sell it today you would earn a total of  1,289  from holding Vanguard Small Cap Index or generate 11.56% return on investment over 90 days.

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

Vanguard Small Cap Index  vs.  Vanguard Materials Index

Vanguard Small Cap

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard Small Cap Index are ranked lower than 13 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Vanguard Small may actually be approaching a critical reversion point that can send shares even higher in December 2024.

Vanguard Materials Index

Risk-Adjusted Performance

4 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard Materials Index are ranked lower than 4 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Vanguard Materials 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 Small and Vanguard Materials

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

The idea behind Vanguard Small Cap Index and Vanguard Materials 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 Portfolio Comparator module to compare the composition, asset allocations and performance of any two portfolios in your account.