Correlation Between Vanguard Extended and Northern Lights

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Can any of the company-specific risk be diversified away by investing in both Vanguard Extended and Northern Lights 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 Extended and Northern Lights into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Vanguard Extended Market and Northern Lights, you can compare the effects of market volatilities on Vanguard Extended and Northern Lights 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 Extended with a short position of Northern Lights. Check out your portfolio center. Please also check ongoing floating volatility patterns of Vanguard Extended and Northern Lights.

Diversification Opportunities for Vanguard Extended and Northern Lights

VanguardNorthernDiversified AwayVanguardNorthernDiversified Away100%
0.94
  Correlation Coefficient

Almost no diversification

The 3 months correlation between Vanguard and Northern is 0.94. Overlapping area represents the amount of risk that can be diversified away by holding Vanguard Extended Market and Northern Lights in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Northern Lights and Vanguard Extended 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 Extended Market are associated (or correlated) with Northern Lights. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Northern Lights has no effect on the direction of Vanguard Extended i.e., Vanguard Extended and Northern Lights go up and down completely randomly.

Pair Corralation between Vanguard Extended and Northern Lights

Considering the 90-day investment horizon Vanguard Extended Market is expected to under-perform the Northern Lights. But the etf apears to be less risky and, when comparing its historical volatility, Vanguard Extended Market is 1.22 times less risky than Northern Lights. The etf trades about -0.22 of its potential returns per unit of risk. The Northern Lights is currently generating about -0.16 of returns per unit of risk over similar time horizon. If you would invest  3,157  in Northern Lights on November 23, 2024 and sell it today you would lose (139.00) from holding Northern Lights or give up 4.4% of portfolio value over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthVery Strong
Accuracy100.0%
ValuesDaily Returns

Vanguard Extended Market  vs.  Northern Lights

 Performance 
JavaScript chart by amCharts 3.21.15Dec2025Feb -4-2024
JavaScript chart by amCharts 3.21.15VXF FDLS
       Timeline  
Vanguard Extended Market 

Risk-Adjusted Performance

Very Weak

 
Weak
 
Strong
Over the last 90 days Vanguard Extended Market has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest abnormal performance, the Etf's basic indicators remain stable and the current disturbance on Wall Street may also be a sign of long-run gains for the Exchange Traded Fund stockholders.
JavaScript chart by amCharts 3.21.15DecJanFebJanFeb190195200205
Northern Lights 

Risk-Adjusted Performance

Very Weak

 
Weak
 
Strong
Over the last 90 days Northern Lights has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of comparatively stable essential indicators, Northern Lights is not utilizing all of its potentials. The recent stock price uproar, may contribute to short-horizon losses for the private investors.
JavaScript chart by amCharts 3.21.15DecJanFebJanFeb29.53030.53131.532

Vanguard Extended and Northern Lights Volatility Contrast

   Predicted Return Density   
JavaScript chart by amCharts 3.21.15-3.42-2.56-1.7-0.840.010.861.722.573.43 0.050.100.150.200.250.300.35
JavaScript chart by amCharts 3.21.15VXF FDLS
       Returns  

Pair Trading with Vanguard Extended and Northern Lights

The main advantage of trading using opposite Vanguard Extended and Northern Lights positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Vanguard Extended position performs unexpectedly, Northern Lights 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 Northern Lights will offset losses from the drop in Northern Lights' long position.
The idea behind Vanguard Extended Market and Northern Lights 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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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 Correlation Analysis module to reduce portfolio risk simply by holding instruments which are not perfectly correlated.

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