Correlation Between Financial Services and Telecommunications

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

By analyzing existing cross correlation between Financial Services Fund and Telecommunications Fund Investor, you can compare the effects of market volatilities on Financial Services and Telecommunications 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 Telecommunications. Check out your portfolio center. Please also check ongoing floating volatility patterns of Financial Services and Telecommunications.

Diversification Opportunities for Financial Services and Telecommunications

0.93

Correlation Coefficient

Financial Services  Telecommunications

Almost no diversification

The 3 months correlation between Financial and Telecommunications is 0.93. Overlapping area represents the amount of risk that can be diversified away by holding Financial Services Fund and Telecommunications Fund Invest in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Telecommunications 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 Fund are associated (or correlated) with Telecommunications. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Telecommunications has no effect on the direction of Financial Services i.e., Financial Services and Telecommunications go up and down completely randomly.

Pair Corralation between Financial Services and Telecommunications

Assuming the 90 days horizon Financial Services is expected to generate 1.11 times less return on investment than Telecommunications. In addition to that, Financial Services is 1.17 times more volatile than Telecommunications Fund Investor. It trades about 0.21 of its total potential returns per unit of risk. Telecommunications Fund Investor is currently generating about 0.27 per unit of volatility. If you would invest  4,780  in Telecommunications Fund Investor on September 8, 2024 and sell it today you would earn a total of  697.00  from holding Telecommunications Fund Investor or generate 14.58% return on investment over 90 days.

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

Financial Services Fund  vs.  Telecommunications Fund Invest

Financial Services

Risk-Adjusted Performance

16 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Financial Services Fund are ranked lower than 16 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak forward indicators, Financial Services may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Telecommunications

Risk-Adjusted Performance

21 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Telecommunications Fund Investor are ranked lower than 21 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak forward indicators, Telecommunications showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Financial Services and Telecommunications

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

The idea behind Financial Services Fund and Telecommunications Fund Investor 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 Risk-Return Analysis module to view associations between returns expected from investment and the risk you assume.