Correlation Between Vanguard Financials and Hennessy Small
Can any of the company-specific risk be diversified away by investing in both Vanguard Financials and Hennessy Small 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 Financials and Hennessy Small into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Vanguard Financials Index and Hennessy Small Cap, you can compare the effects of market volatilities on Vanguard Financials and Hennessy Small 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 Financials with a short position of Hennessy Small. Check out your portfolio center. Please also check ongoing floating volatility patterns of Vanguard Financials and Hennessy Small.
Diversification Opportunities for Vanguard Financials and Hennessy Small
0.97 | Correlation Coefficient |
Almost no diversification
The 3 months correlation between VANGUARD and Hennessy is 0.97. Overlapping area represents the amount of risk that can be diversified away by holding Vanguard Financials Index and Hennessy Small Cap in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Hennessy Small Cap and Vanguard Financials 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 Financials Index are associated (or correlated) with Hennessy Small. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Hennessy Small Cap has no effect on the direction of Vanguard Financials i.e., Vanguard Financials and Hennessy Small go up and down completely randomly.
Pair Corralation between Vanguard Financials and Hennessy Small
Assuming the 90 days horizon Vanguard Financials is expected to generate 1.16 times less return on investment than Hennessy Small. But when comparing it to its historical volatility, Vanguard Financials Index is 1.89 times less risky than Hennessy Small. It trades about 0.32 of its potential returns per unit of risk. Hennessy Small Cap is currently generating about 0.2 of returns per unit of risk over similar time horizon. If you would invest 2,788 in Hennessy Small Cap on September 1, 2024 and sell it today you would earn a total of 368.00 from holding Hennessy Small Cap or generate 13.2% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Very Strong |
| Accuracy | 95.45% |
| Values | Daily Returns |
Vanguard Financials Index vs. Hennessy Small Cap
Performance |
| Timeline |
| Vanguard Financials Index |
| Hennessy Small Cap |
Vanguard Financials and Hennessy Small Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Vanguard Financials and Hennessy Small
The main advantage of trading using opposite Vanguard Financials and Hennessy Small positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Vanguard Financials position performs unexpectedly, Hennessy Small 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 Hennessy Small will offset losses from the drop in Hennessy Small's long position.The idea behind Vanguard Financials Index and Hennessy Small 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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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 Pair Correlation module to compare performance and examine fundamental relationship between any two equity instruments.
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