Correlation Between Vanguard Mid and Extended Market

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

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

Diversification Opportunities for Vanguard Mid and Extended Market

0.99

Correlation Coefficient

Vanguard Mid  Extended Market

No risk reduction

The 3 months correlation between Vanguard and Extended is 0.99. Overlapping area represents the amount of risk that can be diversified away by holding Vanguard Mid Cap Index and Extended Market Index in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Extended Market Index and Vanguard Mid 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 Mid Cap Index are associated (or correlated) with Extended Market. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Extended Market Index has no effect on the direction of Vanguard Mid i.e., Vanguard Mid and Extended Market go up and down completely randomly.

Pair Corralation between Vanguard Mid and Extended Market

Assuming the 90 days horizon Vanguard Mid Cap Index is expected to generate 0.72 times more return on investment than Extended Market. However, Vanguard Mid Cap Index is 1.39 times less risky than Extended Market. It trades about -0.02 of its potential returns per unit of risk. Extended Market Index is currently generating about -0.05 per unit of risk. If you would invest  34,505  in Vanguard Mid Cap Index on September 12, 2024 and sell it today you would lose (126.00) from holding Vanguard Mid Cap Index or give up 0.37% of portfolio value over 90 days.

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

Vanguard Mid Cap Index  vs.  Extended Market Index

Vanguard Mid Cap

Risk-Adjusted Performance

16 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard Mid Cap Index are ranked lower than 16 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Vanguard Mid may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Extended Market Index

Risk-Adjusted Performance

14 of 100

Good

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

Pair Trading with Vanguard Mid and Extended Market

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

The idea behind Vanguard Mid Cap Index and Extended Market 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 Idea Breakdown module to analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes.