Correlation Between Vanguard Utilities and Vanguard Materials
Can any of the company-specific risk be diversified away by investing in both Vanguard Utilities and Vanguard Materials 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 Utilities and Vanguard Materials into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Vanguard Utilities Index and Vanguard Materials Index, you can compare the effects of market volatilities on Vanguard Utilities and Vanguard Materials 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 Utilities with a short position of Vanguard Materials. Check out your portfolio center. Please also check ongoing floating volatility patterns of Vanguard Utilities and Vanguard Materials.
Diversification Opportunities for Vanguard Utilities and Vanguard Materials
0.75 | Correlation Coefficient |
Poor diversification
The 3 months correlation between Vanguard and Vanguard is 0.75. Overlapping area represents the amount of risk that can be diversified away by holding Vanguard Utilities Index and Vanguard Materials Index in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Vanguard Materials Index and Vanguard Utilities 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 Utilities Index are associated (or correlated) with Vanguard Materials. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Vanguard Materials Index has no effect on the direction of Vanguard Utilities i.e., Vanguard Utilities and Vanguard Materials go up and down completely randomly.
Pair Corralation between Vanguard Utilities and Vanguard Materials
Considering the 90-day investment horizon Vanguard Utilities Index is expected to generate 1.03 times more return on investment than Vanguard Materials. However, Vanguard Utilities is 1.03 times more volatile than Vanguard Materials Index. It trades about 0.05 of its potential returns per unit of risk. Vanguard Materials Index is currently generating about 0.05 per unit of risk. If you would invest 14,519 in Vanguard Utilities Index on August 29, 2024 and sell it today you would earn a total of 3,379 from holding Vanguard Utilities Index or generate 23.27% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Significant |
| Accuracy | 100.0% |
| Values | Daily Returns |
Vanguard Utilities Index vs. Vanguard Materials Index
Performance |
| Timeline |
| Vanguard Utilities Index |
| Vanguard Materials Index |
Vanguard Utilities and Vanguard Materials Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Vanguard Utilities and Vanguard Materials
The main advantage of trading using opposite Vanguard Utilities and Vanguard Materials positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Vanguard Utilities position performs unexpectedly, Vanguard Materials 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 Materials will offset losses from the drop in Vanguard Materials' long position.| Vanguard Utilities vs. Vanguard Consumer Staples | Vanguard Utilities vs. Vanguard Materials Index | Vanguard Utilities vs. Vanguard Communication Services | Vanguard Utilities vs. Vanguard Financials 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 Pair Correlation module to compare performance and examine fundamental relationship between any two equity instruments.
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