Correlation Between Vanguard Financials and Invesco KBW

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

By analyzing existing cross correlation between Vanguard Financials Index and Invesco KBW Bank, you can compare the effects of market volatilities on Vanguard Financials and Invesco KBW 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 Vanguard Financials with a short position of Invesco KBW. Check out your portfolio center. Please also check ongoing floating volatility patterns of Vanguard Financials and Invesco KBW.

Diversification Opportunities for Vanguard Financials and Invesco KBW

0.99

Correlation Coefficient

Vanguard Financials  Invesco KBW

No risk reduction

The 3 months correlation between Vanguard and Invesco is 0.99. Overlapping area represents the amount of risk that can be diversified away by holding Vanguard Financials Index and Invesco KBW Bank in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Invesco KBW Bank and Vanguard Financials 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 Vanguard Financials Index are associated (or correlated) with Invesco KBW. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Invesco KBW Bank has no effect on the direction of Vanguard Financials i.e., Vanguard Financials and Invesco KBW go up and down completely randomly.

Pair Corralation between Vanguard Financials and Invesco KBW

Considering the 90-day investment horizon Vanguard Financials is expected to generate 1.39 times less return on investment than Invesco KBW. But when comparing it to its historical volatility, Vanguard Financials Index is 1.5 times less risky than Invesco KBW. It trades about 0.18 of its potential returns per unit of risk. Invesco KBW Bank is currently generating about 0.17 of returns per unit of risk over similar time horizon. If you would invest  5,918  in Invesco KBW Bank on August 30, 2024 and sell it today you would earn a total of  1,187  from holding Invesco KBW Bank or generate 20.06% return on investment over 90 days.

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

Vanguard Financials Index  vs.  Invesco KBW Bank

Vanguard Financials Index

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard Financials Index are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. Despite fairly uncertain technical and fundamental indicators, Vanguard Financials demonstrated solid returns over the last few months and may actually be approaching a breakup point.

Invesco KBW Bank

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Invesco KBW Bank are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Invesco KBW sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Vanguard Financials and Invesco KBW

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

The idea behind Vanguard Financials Index and Invesco KBW Bank 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 USA ETFs module to find actively traded Exchange Traded Funds (ETF) in USA.