Correlation Between Vanguard Explorer and Small Cap

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

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

Diversification Opportunities for Vanguard Explorer and Small Cap

0.92

Correlation Coefficient

Vanguard Explorer  Small Cap

Almost no diversification

The 3 months correlation between Vanguard and Small is 0.92. Overlapping area represents the amount of risk that can be diversified away by holding Vanguard Explorer Fund and Small Cap Growth in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Cap Growth and Vanguard Explorer 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 Explorer Fund are associated (or correlated) with Small Cap. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Small Cap Growth has no effect on the direction of Vanguard Explorer i.e., Vanguard Explorer and Small Cap go up and down completely randomly.

Pair Corralation between Vanguard Explorer and Small Cap

Assuming the 90 days horizon Vanguard Explorer Fund is expected to generate 0.96 times more return on investment than Small Cap. However, Vanguard Explorer Fund is 1.04 times less risky than Small Cap. It trades about 0.03 of its potential returns per unit of risk. Small Cap Growth is currently generating about 0.03 per unit of risk. If you would invest  10,350  in Vanguard Explorer Fund on February 7, 2024 and sell it today you would earn a total of  1,037  from holding Vanguard Explorer Fund or generate 10.02% return on investment over 90 days.

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

Vanguard Explorer Fund  vs.  Small Cap Growth

Vanguard Explorer

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard Explorer Fund are ranked lower than 3 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Vanguard Explorer is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Small Cap Growth

Risk-Adjusted Performance

2 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Small Cap Growth are ranked lower than 2 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Small Cap is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Vanguard Explorer and Small Cap

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

The idea behind Vanguard Explorer Fund and Small Cap Growth 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 Watchlist Optimization module to optimize watchlists to build efficient portfolios or rebalance existing positions based on the mean-variance optimization algorithm.