Correlation Between Vanguard Explorer and The Arbitrage

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

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

Diversification Opportunities for Vanguard Explorer and The Arbitrage

0.64

Correlation Coefficient

Vanguard Explorer  The Arbitrage

Poor diversification

The 3 months correlation between Vanguard and The is 0.64. Overlapping area represents the amount of risk that can be diversified away by holding Vanguard Explorer Fund and The Arbitrage Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on The Arbitrage and Vanguard Explorer 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 Explorer Fund are associated (or correlated) with The Arbitrage. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of The Arbitrage has no effect on the direction of Vanguard Explorer i.e., Vanguard Explorer and The Arbitrage go up and down completely randomly.

Pair Corralation between Vanguard Explorer and The Arbitrage

Assuming the 90 days horizon Vanguard Explorer Fund is expected to generate 4.39 times more return on investment than The Arbitrage. However, Vanguard Explorer is 4.39 times more volatile than The Arbitrage Fund. It trades about 0.18 of its potential returns per unit of risk. The Arbitrage Fund is currently generating about 0.07 per unit of risk. If you would invest  11,012  in Vanguard Explorer Fund on September 2, 2024 and sell it today you would earn a total of  1,265  from holding Vanguard Explorer Fund or generate 11.49% return on investment over 90 days.

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

Vanguard Explorer Fund  vs.  The Arbitrage Fund

Vanguard Explorer

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard Explorer Fund are ranked lower than 14 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Vanguard Explorer may actually be approaching a critical reversion point that can send shares even higher in January 2025.

The Arbitrage

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in The Arbitrage Fund are ranked lower than 5 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong technical and fundamental indicators, The Arbitrage 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 Explorer and The Arbitrage

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

The idea behind Vanguard Explorer Fund and The Arbitrage Fund 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 Equity Forecasting module to use basic forecasting models to generate price predictions and determine price momentum.