Correlation Between PIMCO RAFI and Vanguard Value

Can any of the company-specific risk be diversified away by investing in both PIMCO RAFI and Vanguard Value 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 PIMCO RAFI and Vanguard Value into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between PIMCO RAFI Dynamic and Vanguard Value Index, you can compare the effects of market volatilities on PIMCO RAFI and Vanguard Value 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 PIMCO RAFI with a short position of Vanguard Value. Check out your portfolio center. Please also check ongoing floating volatility patterns of PIMCO RAFI and Vanguard Value.

Diversification Opportunities for PIMCO RAFI and Vanguard Value

0.95

Correlation Coefficient

PIMCO RAFI  Vanguard Value

Almost no diversification

The 3 months correlation between PIMCO and Vanguard is 0.95. Overlapping area represents the amount of risk that can be diversified away by holding PIMCO RAFI Dynamic and Vanguard Value Index in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Vanguard Value Index and PIMCO RAFI 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 PIMCO RAFI Dynamic are associated (or correlated) with Vanguard Value. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Vanguard Value Index has no effect on the direction of PIMCO RAFI i.e., PIMCO RAFI and Vanguard Value go up and down completely randomly.

Pair Corralation between PIMCO RAFI and Vanguard Value

Given the investment horizon of 90 days PIMCO RAFI is expected to generate 1.05 times less return on investment than Vanguard Value. In addition to that, PIMCO RAFI is 1.35 times more volatile than Vanguard Value Index. It trades about 0.24 of its total potential returns per unit of risk. Vanguard Value Index is currently generating about 0.34 per unit of volatility. If you would invest  15,543  in Vanguard Value Index on February 14, 2024 and sell it today you would earn a total of  583.00  from holding Vanguard Value Index or generate 3.75% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Strong
Accuracy	95.45%
Values	Daily Returns

PIMCO RAFI Dynamic  vs.  Vanguard Value Index

PIMCO RAFI Dynamic

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in PIMCO RAFI Dynamic are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. In spite of fairly fragile fundamental indicators, PIMCO RAFI may actually be approaching a critical reversion point that can send shares even higher in June 2024.

Vanguard Value Index

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard Value Index are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. In spite of fairly unfluctuating basic indicators, Vanguard Value may actually be approaching a critical reversion point that can send shares even higher in June 2024.

Pair Trading with PIMCO RAFI and Vanguard Value

The main advantage of trading using opposite PIMCO RAFI and Vanguard Value positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if PIMCO RAFI position performs unexpectedly, Vanguard Value 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 Value will offset losses from the drop in Vanguard Value's long position.

The idea behind PIMCO RAFI Dynamic and Vanguard Value 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.

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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 Portfolio Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.