Correlation Between Ford and Select Sector

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

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

Diversification Opportunities for Ford and Select Sector

0.6

Correlation Coefficient

Ford  Select Sector

Poor diversification

The 3 months correlation between Ford and Select is 0.6. Overlapping area represents the amount of risk that can be diversified away by holding Ford Motor and The Select Sector in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Select Sector and Ford 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 Ford Motor are associated (or correlated) with Select Sector. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Select Sector has no effect on the direction of Ford i.e., Ford and Select Sector go up and down completely randomly.

Pair Corralation between Ford and Select Sector

Taking into account the 90-day investment horizon Ford is expected to generate 4.05 times less return on investment than Select Sector. In addition to that, Ford is 1.86 times more volatile than The Select Sector. It trades about 0.02 of its total potential returns per unit of risk. The Select Sector is currently generating about 0.15 per unit of volatility. If you would invest  188,265  in The Select Sector on September 4, 2024 and sell it today you would earn a total of  103,836  from holding The Select Sector or generate 55.15% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	99.6%
Values	Daily Returns

Ford Motor  vs.  The Select Sector

Ford Motor

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Ford Motor are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable technical and fundamental indicators, Ford is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Select Sector

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in The Select Sector are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak forward indicators, Select Sector showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Ford and Select Sector

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

The idea behind Ford Motor and The Select Sector 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.

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 the Portfolio Center module to all portfolio management and optimization tools to improve performance of your portfolios.