Correlation Between Health Care and Industrials Portfolio

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

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

Diversification Opportunities for Health Care and Industrials Portfolio

0.04

Correlation Coefficient

Health Care  Industrials Portfolio

Significant diversification

The 3 months correlation between Health and Industrials is 0.04. Overlapping area represents the amount of risk that can be diversified away by holding Health Care Services and Industrials Portfolio Industri in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Industrials Portfolio and Health Care 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 Health Care Services are associated (or correlated) with Industrials Portfolio. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Industrials Portfolio has no effect on the direction of Health Care i.e., Health Care and Industrials Portfolio go up and down completely randomly.

Pair Corralation between Health Care and Industrials Portfolio

Assuming the 90 days horizon Health Care Services is expected to under-perform the Industrials Portfolio. In addition to that, Health Care is 1.3 times more volatile than Industrials Portfolio Industrials. It trades about -0.46 of its total potential returns per unit of risk. Industrials Portfolio Industrials is currently generating about -0.39 per unit of volatility. If you would invest  4,624  in Industrials Portfolio Industrials on September 26, 2024 and sell it today you would lose (356.00) from holding Industrials Portfolio Industrials or give up 7.7% of portfolio value over 90 days.

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

Health Care Services  vs.  Industrials Portfolio Industri

Health Care Services

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Health Care Services has generated negative risk-adjusted returns adding no value to fund investors. In spite of weak performance in the last few months, the Fund's fundamental indicators remain fairly strong which may send shares a bit higher in January 2025. The current disturbance may also be a sign of long term up-swing for the fund investors.

Industrials Portfolio

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Industrials Portfolio Industrials has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong forward indicators, Industrials 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 Health Care and Industrials Portfolio

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

The idea behind Health Care Services and Industrials Portfolio Industrials 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 Portfolio Suggestion module to get suggestions outside of your existing asset allocation including your own model portfolios.