Correlation Between ARCA Biotechnology and SEI Investments

Can any of the company-specific risk be diversified away by investing in both ARCA Biotechnology and SEI Investments 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 ARCA Biotechnology and SEI Investments into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between ARCA Biotechnology and SEI Investments, you can compare the effects of market volatilities on ARCA Biotechnology and SEI Investments 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 ARCA Biotechnology with a short position of SEI Investments. Check out your portfolio center. Please also check ongoing floating volatility patterns of ARCA Biotechnology and SEI Investments.

Diversification Opportunities for ARCA Biotechnology and SEI Investments

0.18

Correlation Coefficient

ARCA Biotechnology  SEI Investments

Average diversification

The 3 months correlation between ARCA and SEI is 0.18. Overlapping area represents the amount of risk that can be diversified away by holding ARCA Biotechnology and SEI Investments in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on SEI Investments and ARCA Biotechnology 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 ARCA Biotechnology are associated (or correlated) with SEI Investments. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of SEI Investments has no effect on the direction of ARCA Biotechnology i.e., ARCA Biotechnology and SEI Investments go up and down completely randomly.

Pair Corralation between ARCA Biotechnology and SEI Investments

Assuming the 90 days trading horizon ARCA Biotechnology is expected to generate 50.81 times less return on investment than SEI Investments. But when comparing it to its historical volatility, ARCA Biotechnology is 1.11 times less risky than SEI Investments. It trades about 0.01 of its potential returns per unit of risk. SEI Investments is currently generating about 0.23 of returns per unit of risk over similar time horizon. If you would invest  6,855  in SEI Investments on September 25, 2024 and sell it today you would earn a total of  1,455  from holding SEI Investments or generate 21.23% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Insignificant
Accuracy	100.0%
Values	Daily Returns

ARCA Biotechnology  vs.  SEI Investments

Pair Trading with ARCA Biotechnology and SEI Investments

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

The idea behind ARCA Biotechnology and SEI Investments 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 Equity Forecasting module to use basic forecasting models to generate price predictions and determine price momentum.