Correlation Between Vanguard Small-cap and Pax Small

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

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

Diversification Opportunities for Vanguard Small-cap and Pax Small

0.96

Correlation Coefficient

Vanguard Small-cap  Pax Small

Almost no diversification

The 3 months correlation between Vanguard and Pax is 0.96. Overlapping area represents the amount of risk that can be diversified away by holding Vanguard Small Cap Index and Pax Small Cap in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Pax Small Cap and Vanguard Small-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 Small Cap Index are associated (or correlated) with Pax Small. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Pax Small Cap has no effect on the direction of Vanguard Small-cap i.e., Vanguard Small-cap and Pax Small go up and down completely randomly.

Pair Corralation between Vanguard Small-cap and Pax Small

Assuming the 90 days horizon Vanguard Small Cap Index is expected to generate 0.92 times more return on investment than Pax Small. However, Vanguard Small Cap Index is 1.09 times less risky than Pax Small. It trades about 0.39 of its potential returns per unit of risk. Pax Small Cap is currently generating about 0.34 per unit of risk. If you would invest  32,767  in Vanguard Small Cap Index on September 4, 2024 and sell it today you would earn a total of  3,238  from holding Vanguard Small Cap Index or generate 9.88% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Strong
Accuracy	95.24%
Values	Daily Returns

Vanguard Small Cap Index  vs.  Pax Small Cap

Vanguard Small Cap

Risk-Adjusted Performance

18 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard Small Cap Index are ranked lower than 18 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Vanguard Small-cap showed solid returns over the last few months and may actually be approaching a breakup point.

Pax Small Cap

Risk-Adjusted Performance

16 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Pax Small Cap are ranked lower than 16 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak fundamental indicators, Pax Small showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Vanguard Small-cap and Pax Small

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

The idea behind Vanguard Small Cap Index and Pax Small Cap 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 Money Flow Index module to determine momentum by analyzing Money Flow Index and other technical indicators.