Correlation Between Health Care and Health Biotchnology
Can any of the company-specific risk be diversified away by investing in both Health Care and Health Biotchnology 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 Health Care and Health Biotchnology into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Health Care Fund and Health Biotchnology Portfolio, you can compare the effects of market volatilities on Health Care and Health Biotchnology 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 Health Care with a short position of Health Biotchnology. Check out your portfolio center. Please also check ongoing floating volatility patterns of Health Care and Health Biotchnology.
Diversification Opportunities for Health Care and Health Biotchnology
0.78 | Correlation Coefficient |
Poor diversification
The 3 months correlation between Health and Health is 0.78. Overlapping area represents the amount of risk that can be diversified away by holding Health Care Fund and Health Biotchnology Portfolio in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Health Biotchnology and Health Care 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 Health Care Fund are associated (or correlated) with Health Biotchnology. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Health Biotchnology has no effect on the direction of Health Care i.e., Health Care and Health Biotchnology go up and down completely randomly.
Pair Corralation between Health Care and Health Biotchnology
Assuming the 90 days horizon Health Care Fund is expected to generate 0.99 times more return on investment than Health Biotchnology. However, Health Care Fund is 1.01 times less risky than Health Biotchnology. It trades about -0.11 of its potential returns per unit of risk. Health Biotchnology Portfolio is currently generating about -0.33 per unit of risk. If you would invest 3,044 in Health Care Fund on September 13, 2024 and sell it today you would lose (64.00) from holding Health Care Fund or give up 2.1% of portfolio value over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Significant |
| Accuracy | 100.0% |
| Values | Daily Returns |
Health Care Fund vs. Health Biotchnology Portfolio
Performance |
| Timeline |
| Health Care Fund |
| Health Biotchnology |
Health Care and Health Biotchnology Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Health Care and Health Biotchnology
The main advantage of trading using opposite Health Care and Health Biotchnology positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Health Care position performs unexpectedly, Health Biotchnology 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 Health Biotchnology will offset losses from the drop in Health Biotchnology's long position.| Health Care vs. Basic Materials Fund | Health Care vs. Basic Materials Fund | Health Care vs. Banking Fund Class | Health Care vs. Basic Materials Fund |
| Health Biotchnology vs. Alpine Ultra Short | Health Biotchnology vs. Aqr Long Short Equity | Health Biotchnology vs. Boston Partners Longshort | Health Biotchnology vs. Quantitative Longshort Equity |
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 Pattern Recognition module to use different Pattern Recognition models to time the market across multiple global exchanges.
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