Correlation Between Banking Fund and Energy Fund

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

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

Diversification Opportunities for Banking Fund and Energy Fund

0.44

Correlation Coefficient

Banking Fund  Energy Fund

Very weak diversification

The 3 months correlation between Banking and Energy is 0.44. Overlapping area represents the amount of risk that can be diversified away by holding Banking Fund Class and Energy Fund Class in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Energy Fund Class and Banking Fund 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 Banking Fund Class are associated (or correlated) with Energy Fund. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Energy Fund Class has no effect on the direction of Banking Fund i.e., Banking Fund and Energy Fund go up and down completely randomly.

Pair Corralation between Banking Fund and Energy Fund

Assuming the 90 days horizon Banking Fund Class is expected to generate 1.43 times more return on investment than Energy Fund. However, Banking Fund is 1.43 times more volatile than Energy Fund Class. It trades about 0.0 of its potential returns per unit of risk. Energy Fund Class is currently generating about -0.12 per unit of risk. If you would invest  9,098  in Banking Fund Class on September 26, 2024 and sell it today you would lose (89.00) from holding Banking Fund Class or give up 0.98% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	97.62%
Values	Daily Returns

Banking Fund Class  vs.  Energy Fund Class

Banking Fund Class

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Banking Fund Class are ranked lower than 3 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong forward-looking signals, Banking Fund is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Energy Fund Class

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with Banking Fund and Energy Fund

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

The idea behind Banking Fund Class and Energy Fund Class 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 Anywhere module to track or share privately all of your investments from the convenience of any device.