Correlation Between Smallcap ETF and US Brent

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

Diversification Opportunities for Smallcap ETF and US Brent

0.2
  Correlation Coefficient

Modest diversification

The 3 months correlation between Smallcap and US Brent is 0.2. Overlapping area represents the amount of risk that can be diversified away by holding Smallcap ETF Vanguard and US Brent Oil in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on US Brent Oil and Smallcap ETF 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 Smallcap ETF Vanguard are associated (or correlated) with US Brent. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of US Brent Oil has no effect on the direction of Smallcap ETF i.e., Smallcap ETF and US Brent go up and down completely randomly.

Pair Corralation between Smallcap ETF and US Brent

Allowing for the 90-day total investment horizon Smallcap ETF Vanguard is expected to under-perform the US Brent. But the etf apears to be less risky and, when comparing its historical volatility, Smallcap ETF Vanguard is 1.79 times less risky than US Brent. The etf trades about -0.04 of its potential returns per unit of risk. The US Brent Oil is currently generating about 0.06 of returns per unit of risk over similar time horizon. If you would invest  1,755  in US Brent Oil on July 4, 2022 and sell it today you would earn a total of  977.00  from holding US Brent Oil or generate 55.67% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthVery Weak
Accuracy100.0%
ValuesDaily Returns

Smallcap ETF Vanguard  vs.  US Brent Oil

 Performance (%) 
       Timeline  
Smallcap ETF Vanguard 
Smallcap Performance
0 of 100
Over the last 90 days Smallcap ETF Vanguard has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong fundamental drivers, Smallcap ETF is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Smallcap Price Channel

US Brent Oil 
US Brent Performance
0 of 100
Over the last 90 days US Brent Oil has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest weak performance, the Etf's basic indicators remain persistent and the latest mess on Wall Street may also be a sign of long-standing gains for the ETF venture institutional investors.

US Brent Price Channel

Smallcap ETF and US Brent Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Smallcap ETF and US Brent

The main advantage of trading using opposite Smallcap ETF and US Brent positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Smallcap ETF position performs unexpectedly, US Brent 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 US Brent will offset losses from the drop in US Brent's long position.
The effect of pair diversification on risk is to reduce it, but we should note this doesn't apply to all risk types. When we trade pairs against Smallcap ETF as a counterpart, there is always some inherent risk that will never be diversified away no matter what. This volatility limits the effect of tactical diversification using pair trading. Smallcap ETF's systematic risk is the inherent uncertainty of the entire market, and therefore cannot be mitigated even by pair-trading it against the equity that is not highly correlated to it. On the other hand, Smallcap ETF's unsystematic risk describes the types of risk that we can protect against, at least to some degree, by selecting a matching pair that is not perfectly correlated to Smallcap ETF Vanguard.
The idea behind Smallcap ETF Vanguard and US Brent Oil 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.
US Brent vs. Bank Of America
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 Idea Breakdown module to analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes.

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