Correlation Between Industrial Select and NATO

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

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

Diversification Opportunities for Industrial Select and NATO

0.86

Correlation Coefficient

Industrial Select  NATO

Very poor diversification

The 3 months correlation between Industrial and NATO is 0.86. Overlapping area represents the amount of risk that can be diversified away by holding Industrial Select Sector and NATO in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on NATO and Industrial 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 Industrial Select Sector are associated (or correlated) with NATO. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of NATO has no effect on the direction of Industrial Select i.e., Industrial Select and NATO go up and down completely randomly.

Pair Corralation between Industrial Select and NATO

Considering the 90-day investment horizon Industrial Select is expected to generate 4.14 times less return on investment than NATO. But when comparing it to its historical volatility, Industrial Select Sector is 1.31 times less risky than NATO. It trades about 0.01 of its potential returns per unit of risk. NATO is currently generating about 0.02 of returns per unit of risk over similar time horizon. If you would invest  2,539  in NATO on September 22, 2024 and sell it today you would earn a total of  24.00  from holding NATO or generate 0.95% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	78.13%
Values	Daily Returns

Industrial Select Sector  vs.  NATO

Industrial Select Sector

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Industrial Select Sector has generated negative risk-adjusted returns adding no value to investors with long positions. Despite fairly strong essential indicators, Industrial Select is not utilizing all of its potentials. The current stock price confusion, may contribute to short-horizon losses for the traders.

NATO

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in NATO are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy basic indicators, NATO is not utilizing all of its potentials. The latest stock price disarray, may contribute to short-term losses for the investors.

Pair Trading with Industrial Select and NATO

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

The idea behind Industrial Select Sector and NATO 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 Instant Ratings module to determine any equity ratings based on digital recommendations. Macroaxis instant equity ratings are based on combination of fundamental analysis and risk-adjusted market performance.