Correlation Between Small Cap and Vanguard 500
Can any of the company-specific risk be diversified away by investing in both Small Cap 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 Small Cap and Vanguard 500 into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Small Cap Core and Vanguard 500 Index, you can compare the effects of market volatilities on Small Cap 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 Small Cap with a short position of Vanguard 500. Check out your portfolio center. Please also check ongoing floating volatility patterns of Small Cap and Vanguard 500.
Diversification Opportunities for Small Cap and Vanguard 500
0.9 | Correlation Coefficient |
Almost no diversification
The 3 months correlation between Small and Vanguard is 0.9. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Core 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 Small Cap 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 Small Cap Core 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 Small Cap i.e., Small Cap and Vanguard 500 go up and down completely randomly.
Pair Corralation between Small Cap and Vanguard 500
Assuming the 90 days horizon Small Cap Core is expected to generate 1.99 times more return on investment than Vanguard 500. However, Small Cap is 1.99 times more volatile than Vanguard 500 Index. It trades about 0.23 of its potential returns per unit of risk. Vanguard 500 Index is currently generating about 0.15 per unit of risk. If you would invest 1,390 in Small Cap Core on August 30, 2024 and sell it today you would earn a total of 121.00 from holding Small Cap Core or generate 8.71% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Very Strong |
| Accuracy | 100.0% |
| Values | Daily Returns |
Small Cap Core vs. Vanguard 500 Index
Performance |
| Timeline |
| Small Cap Core |
| Vanguard 500 Index |
Small Cap and Vanguard 500 Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Small Cap and Vanguard 500
The main advantage of trading using opposite Small Cap and Vanguard 500 positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Small Cap 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.| Small Cap vs. Scharf Global Opportunity | Small Cap vs. Ms Global Fixed | Small Cap vs. Barings Global Floating | Small Cap vs. Ab Global Bond |
| Vanguard 500 vs. Vanguard Total Stock | Vanguard 500 vs. Vanguard Total Bond | Vanguard 500 vs. Vanguard Windsor Ii | Vanguard 500 vs. Vanguard Small Cap Index |
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 Transaction History module to view history of all your transactions and understand their impact on performance.
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