Correlation Between Financial Services and Precious Metals
Can any of the company-specific risk be diversified away by investing in both Financial Services and Precious Metals 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 Precious Metals into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Financial Services Fund and Precious Metals Fund, you can compare the effects of market volatilities on Financial Services and Precious Metals 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 Precious Metals. Check out your portfolio center. Please also check ongoing floating volatility patterns of Financial Services and Precious Metals.
Diversification Opportunities for Financial Services and Precious Metals
0.03 | Correlation Coefficient |
Significant diversification
The 3 months correlation between Financial and Precious is 0.03. Overlapping area represents the amount of risk that can be diversified away by holding Financial Services Fund and Precious Metals Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Precious Metals 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 Fund are associated (or correlated) with Precious Metals. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Precious Metals has no effect on the direction of Financial Services i.e., Financial Services and Precious Metals go up and down completely randomly.
Pair Corralation between Financial Services and Precious Metals
Assuming the 90 days horizon Financial Services Fund is expected to generate 0.52 times more return on investment than Precious Metals. However, Financial Services Fund is 1.93 times less risky than Precious Metals. It trades about 0.08 of its potential returns per unit of risk. Precious Metals Fund is currently generating about 0.04 per unit of risk. If you would invest 7,065 in Financial Services Fund on August 26, 2024 and sell it today you would earn a total of 3,248 from holding Financial Services Fund or generate 45.97% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Insignificant |
| Accuracy | 100.0% |
| Values | Daily Returns |
Financial Services Fund vs. Precious Metals Fund
Performance |
| Timeline |
| Financial Services |
| Precious Metals |
Financial Services and Precious Metals Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Financial Services and Precious Metals
The main advantage of trading using opposite Financial Services and Precious Metals positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Financial Services position performs unexpectedly, Precious Metals 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 Precious Metals will offset losses from the drop in Precious Metals' long position.| Financial Services vs. Health Care Fund | Financial Services vs. Banking Fund Investor | Financial Services vs. Technology Fund Investor | Financial Services vs. Transportation Fund Investor |
| Precious Metals vs. Energy Fund Investor | Precious Metals vs. Energy Services Fund | Precious Metals vs. Basic Materials Fund | Precious Metals vs. Health Care Fund |
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 Ceiling Movement module to calculate and plot Price Ceiling Movement for different equity instruments.
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