Correlation Between Vanguard and First Trust

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

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

Diversification Opportunities for Vanguard and First Trust

0.75

Correlation Coefficient

Vanguard  First Trust

Poor diversification

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

Pair Corralation between Vanguard and First Trust

Given the investment horizon of 90 days Vanguard SP Small Cap is expected to generate 0.99 times more return on investment than First Trust. However, Vanguard SP Small Cap is 1.01 times less risky than First Trust. It trades about -0.01 of its potential returns per unit of risk. First Trust Multi Manager is currently generating about -0.06 per unit of risk. If you would invest  9,883  in Vanguard SP Small Cap on February 5, 2024 and sell it today you would lose (39.00) from holding Vanguard SP Small Cap or give up 0.39% of portfolio value over 90 days.

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

Vanguard SP Small Cap  vs.  First Trust Multi Manager

Vanguard SP Small

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard SP Small Cap are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy basic indicators, Vanguard is not utilizing all of its potentials. The latest stock price disarray, may contribute to short-term losses for the investors.

First Trust Multi

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in First Trust Multi Manager are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of rather fragile basic indicators, First Trust may actually be approaching a critical reversion point that can send shares even higher in June 2024.

Pair Trading with Vanguard and First Trust

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

The idea behind Vanguard SP Small Cap and First Trust Multi Manager 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 Sign In To Macroaxis module to sign in to explore Macroaxis' wealth optimization platform and fintech modules.