Correlation Between Energy Select and Health Care

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

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

Diversification Opportunities for Energy Select and Health Care

0.0

Correlation Coefficient

Energy Select  Health Care

Pay attention - limited upside

The 3 months correlation between Energy and Health is 0.0. Overlapping area represents the amount of risk that can be diversified away by holding Energy Select Sector and Health Care Select in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Health Care Select and Energy Select 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 Energy Select Sector are associated (or correlated) with Health Care. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Health Care Select has no effect on the direction of Energy Select i.e., Energy Select and Health Care go up and down completely randomly.

Pair Corralation between Energy Select and Health Care

Considering the 90-day investment horizon Energy Select Sector is expected to generate 1.75 times more return on investment than Health Care. However, Energy Select is 1.75 times more volatile than Health Care Select. It trades about -0.06 of its potential returns per unit of risk. Health Care Select is currently generating about -0.24 per unit of risk. If you would invest  8,912  in Energy Select Sector on September 23, 2024 and sell it today you would lose (498.00) from holding Energy Select Sector or give up 5.59% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Flat
Strength	Insignificant
Accuracy	100.0%
Values	Daily Returns

Energy Select Sector  vs.  Health Care Select

Energy Select Sector

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Energy Select Sector has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound essential indicators, Energy Select is not utilizing all of its potentials. The current stock price tumult, may contribute to shorter-term losses for the shareholders.

Health Care Select

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Health Care Select has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest abnormal performance, the Etf's essential indicators remain stable and the latest fuss on Wall Street may also be a sign of long-term gains for the fund sophisticated investors.

Pair Trading with Energy Select and Health Care

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

The idea behind Energy Select Sector and Health Care Select 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 Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.