Correlation Between SP 500 and United Rentals

Can any of the company-specific risk be diversified away by investing in both SP 500 and United Rentals 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 SP 500 and United Rentals into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between SP 500 Financials and United Rentals, you can compare the effects of market volatilities on SP 500 and United Rentals 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 SP 500 with a short position of United Rentals. Check out your portfolio center. Please also check ongoing floating volatility patterns of SP 500 and United Rentals.

Diversification Opportunities for SP 500 and United Rentals

0.38

Correlation Coefficient

SP 500  United Rentals

Weak diversification

The 3 months correlation between SPSY and United is 0.38. Overlapping area represents the amount of risk that can be diversified away by holding SP 500 Financials and United Rentals in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on United Rentals and SP 500 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 SP 500 Financials are associated (or correlated) with United Rentals. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of United Rentals has no effect on the direction of SP 500 i.e., SP 500 and United Rentals go up and down completely randomly.

Pair Corralation between SP 500 and United Rentals

Assuming the 90 days trading horizon SP 500 Financials is expected to generate 0.57 times more return on investment than United Rentals. However, SP 500 Financials is 1.74 times less risky than United Rentals. It trades about 0.09 of its potential returns per unit of risk. United Rentals is currently generating about -0.07 per unit of risk. If you would invest  75,657  in SP 500 Financials on September 21, 2024 and sell it today you would earn a total of  4,772  from holding SP 500 Financials or generate 6.31% return on investment over 90 days.

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

SP 500 Financials  vs.  United Rentals

Pair Trading with SP 500 and United Rentals

The main advantage of trading using opposite SP 500 and United Rentals positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if SP 500 position performs unexpectedly, United Rentals 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 United Rentals will offset losses from the drop in United Rentals' long position.

The idea behind SP 500 Financials and United Rentals 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 Balance Of Power module to check stock momentum by analyzing Balance Of Power indicator and other technical ratios.