Correlation Between MicroSectors FANG and VCRM

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

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

Diversification Opportunities for MicroSectors FANG and VCRM

0.64

Correlation Coefficient

MicroSectors FANG  VCRM

Poor diversification

The 3 months correlation between MicroSectors and VCRM is 0.64. Overlapping area represents the amount of risk that can be diversified away by holding MicroSectors FANG Index and VCRM in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on VCRM and MicroSectors FANG 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 MicroSectors FANG Index are associated (or correlated) with VCRM. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of VCRM has no effect on the direction of MicroSectors FANG i.e., MicroSectors FANG and VCRM go up and down completely randomly.

Pair Corralation between MicroSectors FANG and VCRM

Given the investment horizon of 90 days MicroSectors FANG Index is expected to generate 13.53 times more return on investment than VCRM. However, MicroSectors FANG is 13.53 times more volatile than VCRM. It trades about 0.17 of its potential returns per unit of risk. VCRM is currently generating about -0.02 per unit of risk. If you would invest  7,197  in MicroSectors FANG Index on September 20, 2024 and sell it today you would earn a total of  2,103  from holding MicroSectors FANG Index or generate 29.22% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	30.16%
Values	Daily Returns

MicroSectors FANG Index  vs.  VCRM

MicroSectors FANG Index

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in MicroSectors FANG Index are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. In spite of very uncertain technical and fundamental indicators, MicroSectors FANG displayed solid returns over the last few months and may actually be approaching a breakup point.

VCRM

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days VCRM has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy basic indicators, VCRM is not utilizing all of its potentials. The newest stock price disarray, may contribute to short-term losses for the investors.

Pair Trading with MicroSectors FANG and VCRM

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

The idea behind MicroSectors FANG Index and VCRM 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 Price Exposure Probability module to analyze equity upside and downside potential for a given time horizon across multiple markets.