Correlation Between Vanguard Value and Vanguard 500

Can any of the company-specific risk be diversified away by investing in both Vanguard Value and Vanguard 500 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 Value and Vanguard 500 into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Vanguard Value Index and Vanguard 500 Index, you can compare the effects of market volatilities on Vanguard Value and Vanguard 500 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 Value with a short position of Vanguard 500. Check out your portfolio center. Please also check ongoing floating volatility patterns of Vanguard Value and Vanguard 500.

Diversification Opportunities for Vanguard Value and Vanguard 500

0.75

Correlation Coefficient

Vanguard Value  Vanguard 500

Poor diversification

The 3 months correlation between Vanguard and Vanguard is 0.75. Overlapping area represents the amount of risk that can be diversified away by holding Vanguard Value Index and Vanguard 500 Index in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Vanguard 500 Index and Vanguard Value 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 Value Index are associated (or correlated) with Vanguard 500. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Vanguard 500 Index has no effect on the direction of Vanguard Value i.e., Vanguard Value and Vanguard 500 go up and down completely randomly.

Pair Corralation between Vanguard Value and Vanguard 500

Assuming the 90 days horizon Vanguard Value is expected to generate 15.3 times less return on investment than Vanguard 500. But when comparing it to its historical volatility, Vanguard Value Index is 1.04 times less risky than Vanguard 500. It trades about 0.01 of its potential returns per unit of risk. Vanguard 500 Index is currently generating about 0.16 of returns per unit of risk over similar time horizon. If you would invest  52,608  in Vanguard 500 Index on September 20, 2024 and sell it today you would earn a total of  3,382  from holding Vanguard 500 Index or generate 6.43% return on investment over 90 days.

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

Vanguard Value Index  vs.  Vanguard 500 Index

Vanguard Value Index

Risk-Adjusted Performance

0 of 100

Weak

Over the last 90 days Vanguard Value Index has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, Vanguard Value is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Vanguard 500 Index

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard 500 Index are ranked lower than 12 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Vanguard 500 may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Vanguard Value and Vanguard 500

The main advantage of trading using opposite Vanguard Value and Vanguard 500 positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Vanguard Value position performs unexpectedly, Vanguard 500 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 500 will offset losses from the drop in Vanguard 500's long position.

The idea behind Vanguard Value Index and Vanguard 500 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 Equity Analysis module to research over 250,000 global equities including funds, stocks and ETFs to find investment opportunities.