Correlation Between Technology Select and ARK Israel

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

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

Diversification Opportunities for Technology Select and ARK Israel

0.83

Correlation Coefficient

Technology Select  ARK Israel

Very poor diversification

The 3 months correlation between Technology and ARK is 0.83. Overlapping area represents the amount of risk that can be diversified away by holding Technology Select Sector and ARK Israel Innovative in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on ARK Israel Innovative and Technology 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 Technology Select Sector are associated (or correlated) with ARK Israel. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of ARK Israel Innovative has no effect on the direction of Technology Select i.e., Technology Select and ARK Israel go up and down completely randomly.

Pair Corralation between Technology Select and ARK Israel

Considering the 90-day investment horizon Technology Select is expected to generate 2.26 times less return on investment than ARK Israel. But when comparing it to its historical volatility, Technology Select Sector is 1.18 times less risky than ARK Israel. It trades about 0.09 of its potential returns per unit of risk. ARK Israel Innovative is currently generating about 0.16 of returns per unit of risk over similar time horizon. If you would invest  1,921  in ARK Israel Innovative on September 22, 2024 and sell it today you would earn a total of  290.35  from holding ARK Israel Innovative or generate 15.11% return on investment over 90 days.

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

Technology Select Sector  vs.  ARK Israel Innovative

Technology Select Sector

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Technology Select Sector are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Despite quite uncertain essential indicators, Technology Select may actually be approaching a critical reversion point that can send shares even higher in January 2025.

ARK Israel Innovative

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in ARK Israel Innovative are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. Despite quite uncertain basic indicators, ARK Israel disclosed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Technology Select and ARK Israel

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

The idea behind Technology Select Sector and ARK Israel Innovative 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 Portfolio Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.