Correlation Between Principal and Vanguard

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

By analyzing existing cross correlation between Principal and Vanguard SP 500, you can compare the effects of market volatilities on Principal and Vanguard 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 Principal with a short position of Vanguard. Check out your portfolio center. Please also check ongoing floating volatility patterns of Principal and Vanguard.

Diversification Opportunities for Principal and Vanguard

0.9

Correlation Coefficient

Principal  Vanguard

Almost no diversification

The 3 months correlation between Principal and Vanguard is 0.9. Overlapping area represents the amount of risk that can be diversified away by holding Principal and Vanguard SP 500 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Vanguard SP 500 and Principal 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 Principal are associated (or correlated) with Vanguard. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Vanguard SP 500 has no effect on the direction of Principal i.e., Principal and Vanguard go up and down completely randomly.

Pair Corralation between Principal and Vanguard

If you would invest  52,328  in Vanguard SP 500 on September 19, 2024 and sell it today you would earn a total of  3,217  from holding Vanguard SP 500 or generate 6.15% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Strong
Accuracy	1.59%
Values	Daily Returns

Principal  vs.  Vanguard SP 500

Principal

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Principal has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable basic indicators, Principal is not utilizing all of its potentials. The recent stock price disturbance, may contribute to mid-run losses for the stockholders.

Vanguard SP 500

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard SP 500 are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy basic indicators, Vanguard is not utilizing all of its potentials. The recent stock price disarray, may contribute to short-term losses for the investors.

Pair Trading with Principal and Vanguard

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

The idea behind Principal and Vanguard SP 500 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 Price Exposure Probability module to analyze equity upside and downside potential for a given time horizon across multiple markets.