Correlation Between Vanguard Mid-cap and Vanguard Small

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

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

Diversification Opportunities for Vanguard Mid-cap and Vanguard Small

0.97

Correlation Coefficient

Vanguard Mid-cap  Vanguard Small

Almost no diversification

The 3 months correlation between Vanguard and Vanguard is 0.97. Overlapping area represents the amount of risk that can be diversified away by holding Vanguard Mid Cap Value and Vanguard Small Cap Value in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Vanguard Small Cap and Vanguard Mid-cap 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 Value are associated (or correlated) with Vanguard Small. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Vanguard Small Cap has no effect on the direction of Vanguard Mid-cap i.e., Vanguard Mid-cap and Vanguard Small go up and down completely randomly.

Pair Corralation between Vanguard Mid-cap and Vanguard Small

Assuming the 90 days horizon Vanguard Mid-cap is expected to generate 1.35 times less return on investment than Vanguard Small. But when comparing it to its historical volatility, Vanguard Mid Cap Value is 1.52 times less risky than Vanguard Small. It trades about 0.2 of its potential returns per unit of risk. Vanguard Small Cap Value is currently generating about 0.18 of returns per unit of risk over similar time horizon. If you would invest  4,640  in Vanguard Small Cap Value on September 2, 2024 and sell it today you would earn a total of  546.00  from holding Vanguard Small Cap Value or generate 11.77% return on investment over 90 days.

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

Vanguard Mid Cap Value  vs.  Vanguard Small Cap Value

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 Value 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-cap may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Vanguard Small Cap

Risk-Adjusted Performance

14 of 100

Good

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

Pair Trading with Vanguard Mid-cap and Vanguard Small

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

The idea behind Vanguard Mid Cap Value and Vanguard Small Cap Value 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.

Check out your portfolio center.

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 Price Transformation module to use Price Transformation models to analyze the depth of different equity instruments across global markets.