Correlation Between Financial Select and Consumer Discretionary

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

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

Diversification Opportunities for Financial Select and Consumer Discretionary

0.79

Correlation Coefficient

Financial Select  Consumer Discretionary

Poor diversification

The 3 months correlation between Financial and Consumer is 0.79. Overlapping area represents the amount of risk that can be diversified away by holding Financial Select Sector and Consumer Discretionary Select in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Consumer Discretionary and Financial 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 Financial Select Sector are associated (or correlated) with Consumer Discretionary. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Consumer Discretionary has no effect on the direction of Financial Select i.e., Financial Select and Consumer Discretionary go up and down completely randomly.

Pair Corralation between Financial Select and Consumer Discretionary

Considering the 90-day investment horizon Financial Select is expected to generate 2.11 times less return on investment than Consumer Discretionary. But when comparing it to its historical volatility, Financial Select Sector is 1.05 times less risky than Consumer Discretionary. It trades about 0.09 of its potential returns per unit of risk. Consumer Discretionary Select is currently generating about 0.19 of returns per unit of risk over similar time horizon. If you would invest  19,867  in Consumer Discretionary Select on September 23, 2024 and sell it today you would earn a total of  3,024  from holding Consumer Discretionary Select or generate 15.22% return on investment over 90 days.

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

Financial Select Sector  vs.  Consumer Discretionary Select

Financial Select Sector

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Financial Select Sector are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. Despite nearly unsteady essential indicators, Financial Select may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Consumer Discretionary

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Consumer Discretionary Select are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. In spite of fairly inconsistent essential indicators, Consumer Discretionary showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Financial Select and Consumer Discretionary

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

The idea behind Financial Select Sector and Consumer Discretionary 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.

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 Price Exposure Probability module to analyze equity upside and downside potential for a given time horizon across multiple markets.