Correlation Between Materials Select and Health Care
Can any of the company-specific risk be diversified away by investing in both Materials Select and Health Care 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 Materials Select and Health Care into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Materials Select Sector and Health Care Select, you can compare the effects of market volatilities on Materials Select and Health Care 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 Materials Select with a short position of Health Care. Check out your portfolio center. Please also check ongoing floating volatility patterns of Materials Select and Health Care.
Diversification Opportunities for Materials Select and Health Care
0.74 | Correlation Coefficient |
Poor diversification
The 3 months correlation between Materials and Health is 0.74. Overlapping area represents the amount of risk that can be diversified away by holding Materials Select Sector and Health Care Select in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Health Care Select and Materials 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 Materials Select Sector are associated (or correlated) with Health Care. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Health Care Select has no effect on the direction of Materials Select i.e., Materials Select and Health Care go up and down completely randomly.
Pair Corralation between Materials Select and Health Care
Considering the 90-day investment horizon Materials Select Sector is expected to generate 1.32 times more return on investment than Health Care. However, Materials Select is 1.32 times more volatile than Health Care Select. It trades about 0.04 of its potential returns per unit of risk. Health Care Select is currently generating about 0.05 per unit of risk. If you would invest 7,689 in Materials Select Sector on November 9, 2024 and sell it today you would earn a total of 1,249 from holding Materials Select Sector or generate 16.24% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Significant |
| Accuracy | 100.0% |
| Values | Daily Returns |
Materials Select Sector vs. Health Care Select
Performance |
| Timeline |
| Materials Select Sector |
| Health Care Select |
Materials Select and Health Care Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Materials Select and Health Care
The main advantage of trading using opposite Materials Select and Health Care positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Materials Select position performs unexpectedly, Health Care 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 Care will offset losses from the drop in Health Care's long position.| Materials Select vs. Industrial Select Sector | Materials Select vs. Consumer Discretionary Select | Materials Select vs. Consumer Staples Select | Materials Select vs. Utilities Select Sector |
| Health Care vs. Consumer Staples Select | Health Care vs. Industrial Select Sector | Health Care vs. Consumer Discretionary Select | Health Care vs. Utilities Select Sector |
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 Transformation module to use Price Transformation models to analyze the depth of different equity instruments across global markets.
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