Correlation Between Financial Services and Industrials Portfolio
Can any of the company-specific risk be diversified away by investing in both Financial Services and Industrials Portfolio 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 Services and Industrials Portfolio into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Financial Services Portfolio and Industrials Portfolio Industrials, you can compare the effects of market volatilities on Financial Services and Industrials Portfolio 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 Services with a short position of Industrials Portfolio. Check out your portfolio center. Please also check ongoing floating volatility patterns of Financial Services and Industrials Portfolio.
Diversification Opportunities for Financial Services and Industrials Portfolio
0.78 | Correlation Coefficient |
Poor diversification
The 3 months correlation between Financial and Industrials is 0.78. Overlapping area represents the amount of risk that can be diversified away by holding Financial Services Portfolio and Industrials Portfolio Industri in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Industrials Portfolio and Financial Services 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 Services Portfolio are associated (or correlated) with Industrials Portfolio. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Industrials Portfolio has no effect on the direction of Financial Services i.e., Financial Services and Industrials Portfolio go up and down completely randomly.
Pair Corralation between Financial Services and Industrials Portfolio
Assuming the 90 days horizon Financial Services Portfolio is expected to generate 0.79 times more return on investment than Industrials Portfolio. However, Financial Services Portfolio is 1.26 times less risky than Industrials Portfolio. It trades about 0.32 of its potential returns per unit of risk. Industrials Portfolio Industrials is currently generating about 0.15 per unit of risk. If you would invest 1,500 in Financial Services Portfolio on November 5, 2024 and sell it today you would earn a total of 96.00 from holding Financial Services Portfolio or generate 6.4% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Significant |
| Accuracy | 100.0% |
| Values | Daily Returns |
Financial Services Portfolio vs. Industrials Portfolio Industri
Performance |
| Timeline |
| Financial Services |
| Industrials Portfolio |
Financial Services and Industrials Portfolio Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Financial Services and Industrials Portfolio
The main advantage of trading using opposite Financial Services and Industrials Portfolio positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Financial Services position performs unexpectedly, Industrials Portfolio 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 Industrials Portfolio will offset losses from the drop in Industrials Portfolio's long position.The idea behind Financial Services Portfolio and Industrials Portfolio Industrials 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 Sectors module to list of equity sectors categorizing publicly traded companies based on their primary business activities.
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