Correlation Between Core and SXP

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

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

Diversification Opportunities for Core and SXP

0.57

Correlation Coefficient

Core  SXP

Very weak diversification

The 3 months correlation between Core and SXP is 0.57. Overlapping area represents the amount of risk that can be diversified away by holding Core and SXP in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on SXP and Core 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 Core are associated (or correlated) with SXP. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of SXP has no effect on the direction of Core i.e., Core and SXP go up and down completely randomly.

Pair Corralation between Core and SXP

Assuming the 90 days trading horizon Core is expected to generate 1.08 times less return on investment than SXP. But when comparing it to its historical volatility, Core is 1.22 times less risky than SXP. It trades about 0.19 of its potential returns per unit of risk. SXP is currently generating about 0.17 of returns per unit of risk over similar time horizon. If you would invest  20.00  in SXP on September 3, 2024 and sell it today you would earn a total of  25.00  from holding SXP or generate 125.0% return on investment over 90 days.

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

Core  vs.  SXP

Core

Risk-Adjusted Performance

15 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Core are ranked lower than 15 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady fundamental indicators, Core exhibited solid returns over the last few months and may actually be approaching a breakup point.

SXP

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in SXP are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady basic indicators, SXP exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Core and SXP

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

The idea behind Core and SXP 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 Bonds Directory module to find actively traded corporate debentures issued by US companies.