Correlation Between Financial Services and Health Biotchnology

Can any of the company-specific risk be diversified away by investing in both Financial Services and Health Biotchnology 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 Health Biotchnology 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 Health Biotchnology Portfolio, you can compare the effects of market volatilities on Financial Services and Health Biotchnology 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 Health Biotchnology. Check out your portfolio center. Please also check ongoing floating volatility patterns of Financial Services and Health Biotchnology.

Diversification Opportunities for Financial Services and Health Biotchnology

-0.52

Correlation Coefficient

Financial Services  Health Biotchnology

Excellent diversification

The 3 months correlation between Financial and Health is -0.52. Overlapping area represents the amount of risk that can be diversified away by holding Financial Services Portfolio and Health Biotchnology Portfolio in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Health Biotchnology 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 Health Biotchnology. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Health Biotchnology has no effect on the direction of Financial Services i.e., Financial Services and Health Biotchnology go up and down completely randomly.

Pair Corralation between Financial Services and Health Biotchnology

Assuming the 90 days horizon Financial Services Portfolio is expected to generate 1.71 times more return on investment than Health Biotchnology. However, Financial Services is 1.71 times more volatile than Health Biotchnology Portfolio. It trades about 0.09 of its potential returns per unit of risk. Health Biotchnology Portfolio is currently generating about -0.16 per unit of risk. If you would invest  879.00  in Financial Services Portfolio on September 12, 2024 and sell it today you would earn a total of  70.00  from holding Financial Services Portfolio or generate 7.96% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Very Weak
Accuracy	98.44%
Values	Daily Returns

Financial Services Portfolio  vs.  Health Biotchnology Portfolio

Financial Services

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Financial Services Portfolio are ranked lower than 7 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak fundamental indicators, Financial Services may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Health Biotchnology

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Health Biotchnology Portfolio has generated negative risk-adjusted returns adding no value to fund investors. In spite of latest weak performance, the Fund's fundamental indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the fund investors.

Pair Trading with Financial Services and Health Biotchnology

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

The idea behind Financial Services Portfolio and Health Biotchnology Portfolio 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 Portfolio Center module to all portfolio management and optimization tools to improve performance of your portfolios.