Correlation Between Vanguard Short-term and Metropolitan West

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

By analyzing existing cross correlation between Vanguard Short Term Bond and Metropolitan West Low, you can compare the effects of market volatilities on Vanguard Short-term and Metropolitan West 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 Short-term with a short position of Metropolitan West. Check out your portfolio center. Please also check ongoing floating volatility patterns of Vanguard Short-term and Metropolitan West.

Diversification Opportunities for Vanguard Short-term and Metropolitan West

0.97

Correlation Coefficient

Vanguard Short-term  Metropolitan West

Almost no diversification

The 3 months correlation between Vanguard and Metropolitan is 0.97. Overlapping area represents the amount of risk that can be diversified away by holding Vanguard Short Term Bond and Metropolitan West Low in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Metropolitan West Low and Vanguard Short-term 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 Short Term Bond are associated (or correlated) with Metropolitan West. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Metropolitan West Low has no effect on the direction of Vanguard Short-term i.e., Vanguard Short-term and Metropolitan West go up and down completely randomly.

Pair Corralation between Vanguard Short-term and Metropolitan West

Assuming the 90 days horizon Vanguard Short Term Bond is expected to under-perform the Metropolitan West. But the mutual fund apears to be less risky and, when comparing its historical volatility, Vanguard Short Term Bond is 1.09 times less risky than Metropolitan West. The mutual fund trades about -0.06 of its potential returns per unit of risk. The Metropolitan West Low is currently generating about -0.05 of returns per unit of risk over similar time horizon. If you would invest  1,083  in Metropolitan West Low on September 4, 2024 and sell it today you would lose (5.00) from holding Metropolitan West Low or give up 0.46% of portfolio value over 90 days.

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

Vanguard Short Term Bond  vs.  Metropolitan West Low

Vanguard Short Term

Risk-Adjusted Performance

0 of 100

Very Weak

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

Metropolitan West Low

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Metropolitan West Low has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, Metropolitan West 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 Short-term and Metropolitan West

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

The idea behind Vanguard Short Term Bond and Metropolitan West Low 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 Global Correlations module to find global opportunities by holding instruments from different markets.