Correlation Between Vanguard and Vanguard Quality

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

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

Diversification Opportunities for Vanguard and Vanguard Quality

0.87

Correlation Coefficient

Vanguard  Vanguard Quality

Very poor diversification

The 3 months correlation between Vanguard and Vanguard is 0.87. Overlapping area represents the amount of risk that can be diversified away by holding Vanguard SP Small Cap and Vanguard Quality Factor in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Vanguard Quality Factor and Vanguard 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 SP Small Cap are associated (or correlated) with Vanguard Quality. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Vanguard Quality Factor has no effect on the direction of Vanguard i.e., Vanguard and Vanguard Quality go up and down completely randomly.

Pair Corralation between Vanguard and Vanguard Quality

Given the investment horizon of 90 days Vanguard is expected to generate 1.15 times less return on investment than Vanguard Quality. In addition to that, Vanguard is 1.31 times more volatile than Vanguard Quality Factor. It trades about 0.06 of its total potential returns per unit of risk. Vanguard Quality Factor is currently generating about 0.08 per unit of volatility. If you would invest  10,229  in Vanguard Quality Factor on September 14, 2024 and sell it today you would earn a total of  4,527  from holding Vanguard Quality Factor or generate 44.26% return on investment over 90 days.

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

Vanguard SP Small Cap  vs.  Vanguard Quality Factor

Vanguard SP Small

Risk-Adjusted Performance

6 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard SP Small Cap are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Despite nearly abnormal basic indicators, Vanguard may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Vanguard Quality Factor

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard Quality Factor are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of fairly strong basic indicators, Vanguard Quality is not utilizing all of its potentials. The recent stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Vanguard and Vanguard Quality

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

The idea behind Vanguard SP Small Cap and Vanguard Quality Factor 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 Portfolio Comparator module to compare the composition, asset allocations and performance of any two portfolios in your account.