Correlation Between Vanguard Financials and Vanguard Energy

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Can any of the company-specific risk be diversified away by investing in both Vanguard Financials and Vanguard Energy 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 Financials and Vanguard Energy into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Vanguard Financials Index and Vanguard Energy Fund, you can compare the effects of market volatilities on Vanguard Financials and Vanguard Energy 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 Financials with a short position of Vanguard Energy. Check out your portfolio center. Please also check ongoing floating volatility patterns of Vanguard Financials and Vanguard Energy.

Diversification Opportunities for Vanguard Financials and Vanguard Energy

0.63
  Correlation Coefficient

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 Financials Index and Vanguard Energy Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Vanguard Energy and Vanguard Financials 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 Financials Index are associated (or correlated) with Vanguard Energy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Vanguard Energy has no effect on the direction of Vanguard Financials i.e., Vanguard Financials and Vanguard Energy go up and down completely randomly.

Pair Corralation between Vanguard Financials and Vanguard Energy

Assuming the 90 days horizon Vanguard Financials Index is expected to generate 1.8 times more return on investment than Vanguard Energy. However, Vanguard Financials is 1.8 times more volatile than Vanguard Energy Fund. It trades about 0.2 of its potential returns per unit of risk. Vanguard Energy Fund is currently generating about 0.06 per unit of risk. If you would invest  5,334  in Vanguard Financials Index on September 11, 2024 and sell it today you would earn a total of  800.00  from holding Vanguard Financials Index or generate 15.0% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthSignificant
Accuracy100.0%
ValuesDaily Returns

Vanguard Financials Index  vs.  Vanguard Energy Fund

 Performance 
       Timeline  
Vanguard Financials Index 

Risk-Adjusted Performance

15 of 100

 
Weak
 
Strong
Good
Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard Financials Index are ranked lower than 15 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly inconsistent forward indicators, Vanguard Financials showed solid returns over the last few months and may actually be approaching a breakup point.
Vanguard Energy 

Risk-Adjusted Performance

4 of 100

 
Weak
 
Strong
Insignificant
Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard Energy Fund 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 Energy is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Vanguard Financials and Vanguard Energy Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Vanguard Financials and Vanguard Energy

The main advantage of trading using opposite Vanguard Financials and Vanguard Energy positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Vanguard Financials position performs unexpectedly, Vanguard Energy 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 Energy will offset losses from the drop in Vanguard Energy's long position.
The idea behind Vanguard Financials Index and Vanguard Energy 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 Odds Of Bankruptcy module to get analysis of equity chance of financial distress in the next 2 years.

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