Correlation Between Vanguard Total and Small Cap

Can any of the company-specific risk be diversified away by investing in both Vanguard Total 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 Total 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 Total Stock and Small Cap Equity, you can compare the effects of market volatilities on Vanguard Total 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 Total with a short position of Small Cap. Check out your portfolio center. Please also check ongoing floating volatility patterns of Vanguard Total and Small Cap.

Diversification Opportunities for Vanguard Total and Small Cap

0.97

Correlation Coefficient

Vanguard Total  Small Cap

Almost no diversification

The 3 months correlation between Vanguard and Small is 0.97. Overlapping area represents the amount of risk that can be diversified away by holding Vanguard Total Stock and Small Cap Equity in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Cap Equity and Vanguard Total 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 Total Stock 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 Equity has no effect on the direction of Vanguard Total i.e., Vanguard Total and Small Cap go up and down completely randomly.

Pair Corralation between Vanguard Total and Small Cap

Assuming the 90 days horizon Vanguard Total Stock is expected to generate 0.77 times more return on investment than Small Cap. However, Vanguard Total Stock is 1.3 times less risky than Small Cap. It trades about 0.22 of its potential returns per unit of risk. Small Cap Equity is currently generating about 0.14 per unit of risk. If you would invest  13,454  in Vanguard Total Stock on May 3, 2025 and sell it today you would earn a total of  1,437  from holding Vanguard Total Stock or generate 10.68% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Strong
Accuracy	98.39%
Values	Daily Returns

Vanguard Total Stock  vs.  Small Cap Equity

Vanguard Total Stock

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard Total Stock are ranked lower than 17 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Vanguard Total may actually be approaching a critical reversion point that can send shares even higher in September 2025.

Small Cap Equity

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Small Cap Equity are ranked lower than 11 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Small Cap may actually be approaching a critical reversion point that can send shares even higher in September 2025.

Pair Trading with Vanguard Total and Small Cap

The main advantage of trading using opposite Vanguard Total and Small Cap positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Vanguard Total 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 Total Stock and Small Cap Equity 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.

Check out your portfolio center.

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 Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.