Correlation Between Vanguard Small and Diamond Hill

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

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

Diversification Opportunities for Vanguard Small and Diamond Hill

0.99

Correlation Coefficient

Vanguard Small  Diamond Hill

No risk reduction

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

Pair Corralation between Vanguard Small and Diamond Hill

Assuming the 90 days horizon Vanguard Small is expected to generate 1.34 times less return on investment than Diamond Hill. But when comparing it to its historical volatility, Vanguard Small Cap Value is 1.38 times less risky than Diamond Hill. It trades about 0.14 of its potential returns per unit of risk. Diamond Hill Small is currently generating about 0.14 of returns per unit of risk over similar time horizon. If you would invest  2,638  in Diamond Hill Small on September 13, 2024 and sell it today you would earn a total of  305.00  from holding Diamond Hill Small or generate 11.56% return on investment over 90 days.

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

Vanguard Small Cap Value  vs.  Diamond Hill Small

Vanguard Small Cap

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard Small Cap Value are ranked lower than 11 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Vanguard Small may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Diamond Hill Small

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Diamond Hill Small are ranked lower than 10 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak forward indicators, Diamond Hill may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Vanguard Small and Diamond Hill

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

The idea behind Vanguard Small Cap Value and Diamond Hill Small 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 Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.