Correlation Between Vanguard Financials and Vanguard Energy
Can any of the company-specific risk be diversified away by investing in both Vanguard Financials and Vanguard Energy 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 Vanguard Energy 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 Vanguard Energy Index, you can compare the effects of market volatilities on Vanguard Financials and Vanguard Energy 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 Vanguard Energy. Check out your portfolio center. Please also check ongoing floating volatility patterns of Vanguard Financials and Vanguard Energy.
Diversification Opportunities for Vanguard Financials and Vanguard Energy
0.81 | Correlation Coefficient |
Very poor diversification
The 3 months correlation between Vanguard and Vanguard is 0.81. Overlapping area represents the amount of risk that can be diversified away by holding Vanguard Financials Index and Vanguard Energy Index in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Vanguard Energy Index 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 Vanguard Energy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Vanguard Energy Index has no effect on the direction of Vanguard Financials i.e., Vanguard Financials and Vanguard Energy go up and down completely randomly.
Pair Corralation between Vanguard Financials and Vanguard Energy
Assuming the 90 days horizon Vanguard Financials Index is expected to generate 0.77 times more return on investment than Vanguard Energy. However, Vanguard Financials Index is 1.29 times less risky than Vanguard Energy. It trades about 0.09 of its potential returns per unit of risk. Vanguard Energy Index is currently generating about 0.04 per unit of risk. If you would invest 4,033 in Vanguard Financials Index on August 28, 2024 and sell it today you would earn a total of 2,269 from holding Vanguard Financials Index or generate 56.26% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Strong |
| Accuracy | 100.0% |
| Values | Daily Returns |
Vanguard Financials Index vs. Vanguard Energy Index
Performance |
| Timeline |
| Vanguard Financials Index |
| Vanguard Energy Index |
Vanguard Financials and Vanguard Energy Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Vanguard Financials and Vanguard Energy
The main advantage of trading using opposite Vanguard Financials and Vanguard Energy positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Vanguard Financials position performs unexpectedly, Vanguard Energy 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 Energy will offset losses from the drop in Vanguard Energy's long position.The idea behind Vanguard Financials Index and Vanguard Energy Index 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.
| Vanguard Energy vs. Vanguard Financials Index | Vanguard Energy vs. Vanguard Utilities Index | Vanguard Energy vs. Vanguard Materials Index | Vanguard Energy vs. Vanguard Sumer Staples |
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 Anywhere module to track or share privately all of your investments from the convenience of any device.
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