Correlation Between Financial Services and Materials Portfolio

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

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

Diversification Opportunities for Financial Services and Materials Portfolio

0.05

Correlation Coefficient

Financial Services  Materials Portfolio

Significant diversification

The 3 months correlation between Financial and Materials is 0.05. Overlapping area represents the amount of risk that can be diversified away by holding Financial Services Portfolio and Materials Portfolio Materials in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Materials Portfolio and Financial Services 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 Financial Services Portfolio are associated (or correlated) with Materials Portfolio. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Materials Portfolio has no effect on the direction of Financial Services i.e., Financial Services and Materials Portfolio go up and down completely randomly.

Pair Corralation between Financial Services and Materials Portfolio

Assuming the 90 days horizon Financial Services Portfolio is expected to generate 1.46 times more return on investment than Materials Portfolio. However, Financial Services is 1.46 times more volatile than Materials Portfolio Materials. It trades about 0.16 of its potential returns per unit of risk. Materials Portfolio Materials is currently generating about -0.03 per unit of risk. If you would invest  1,423  in Financial Services Portfolio on September 18, 2024 and sell it today you would earn a total of  189.00  from holding Financial Services Portfolio or generate 13.28% return on investment over 90 days.

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

Financial Services Portfolio  vs.  Materials Portfolio Materials

Financial Services

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Financial Services Portfolio are ranked lower than 12 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Financial Services showed solid returns over the last few months and may actually be approaching a breakup point.

Materials Portfolio

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Materials Portfolio Materials has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, Materials Portfolio is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Financial Services and Materials Portfolio

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

The idea behind Financial Services Portfolio and Materials Portfolio Materials 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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.