Correlation Between Vanguard Small and IShares SP

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

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

Diversification Opportunities for Vanguard Small and IShares SP

0.84

Correlation Coefficient

Vanguard Small  IShares SP

Very poor diversification

The 3 months correlation between Vanguard and IShares is 0.84. Overlapping area represents the amount of risk that can be diversified away by holding Vanguard Small Cap Value and iShares SP Mid Cap in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on iShares SP Mid and Vanguard Small 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 Value are associated (or correlated) with IShares SP. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of iShares SP Mid has no effect on the direction of Vanguard Small i.e., Vanguard Small and IShares SP go up and down completely randomly.

Pair Corralation between Vanguard Small and IShares SP

Considering the 90-day investment horizon Vanguard Small Cap Value is expected to generate 0.97 times more return on investment than IShares SP. However, Vanguard Small Cap Value is 1.03 times less risky than IShares SP. It trades about 0.05 of its potential returns per unit of risk. iShares SP Mid Cap is currently generating about 0.01 per unit of risk. If you would invest  18,664  in Vanguard Small Cap Value on July 5, 2024 and sell it today you would earn a total of  1,072  from holding Vanguard Small Cap Value or generate 5.74% return on investment over 90 days.

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

Vanguard Small Cap Value  vs.  iShares SP Mid Cap

Vanguard Small Cap

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard Small Cap Value are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. Even with relatively unsteady fundamental drivers, Vanguard Small may actually be approaching a critical reversion point that can send shares even higher in November 2024.

iShares SP Mid

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in iShares SP Mid Cap are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Despite quite persistent forward-looking indicators, IShares SP is not utilizing all of its potentials. The latest stock price mess, may contribute to short-term losses for the institutional investors.

Pair Trading with Vanguard Small and IShares SP

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

The idea behind Vanguard Small Cap Value and iShares SP Mid 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 Portfolio Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.