Correlation Between Industrial Select and Invesco SP

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Can any of the company-specific risk be diversified away by investing in both Industrial Select and Invesco SP 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 Industrial Select and Invesco SP into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Industrial Select Sector and Invesco SP 500, you can compare the effects of market volatilities on Industrial Select and Invesco SP 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 Industrial Select with a short position of Invesco SP. Check out your portfolio center. Please also check ongoing floating volatility patterns of Industrial Select and Invesco SP.

Diversification Opportunities for Industrial Select and Invesco SP

IndustrialInvescoDiversified AwayIndustrialInvescoDiversified Away100%
0.86
  Correlation Coefficient

Very poor diversification

The 3 months correlation between Industrial and Invesco is 0.86. Overlapping area represents the amount of risk that can be diversified away by holding Industrial Select Sector and Invesco SP 500 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Invesco SP 500 and Industrial 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 Industrial Select Sector are associated (or correlated) with Invesco SP. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Invesco SP 500 has no effect on the direction of Industrial Select i.e., Industrial Select and Invesco SP go up and down completely randomly.

Pair Corralation between Industrial Select and Invesco SP

Considering the 90-day investment horizon Industrial Select Sector is expected to generate 1.05 times more return on investment than Invesco SP. However, Industrial Select is 1.05 times more volatile than Invesco SP 500. It trades about -0.2 of its potential returns per unit of risk. Invesco SP 500 is currently generating about -0.28 per unit of risk. If you would invest  13,918  in Industrial Select Sector on November 27, 2024 and sell it today you would lose (426.00) from holding Industrial Select Sector or give up 3.06% of portfolio value over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthStrong
Accuracy100.0%
ValuesDaily Returns

Industrial Select Sector  vs.  Invesco SP 500

 Performance 
JavaScript chart by amCharts 3.21.15Dec2025Feb -8-6-4-2024
JavaScript chart by amCharts 3.21.15XLI RSPN
       Timeline  
Industrial Select Sector 

Risk-Adjusted Performance

Very Weak

 
Weak
 
Strong
Over the last 90 days Industrial Select Sector has generated negative risk-adjusted returns adding no value to investors with long positions. Despite fairly strong essential indicators, Industrial Select is not utilizing all of its potentials. The current stock price confusion, may contribute to short-horizon losses for the traders.
JavaScript chart by amCharts 3.21.15DecJanFebJanFeb132134136138140142144
Invesco SP 500 

Risk-Adjusted Performance

Very Weak

 
Weak
 
Strong
Over the last 90 days Invesco SP 500 has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest uncertain performance, the Etf's basic indicators remain healthy and the recent disarray on Wall Street may also be a sign of long period gains for the ETF investors.
JavaScript chart by amCharts 3.21.15DecJanFebJanFeb505152535455

Industrial Select and Invesco SP Volatility Contrast

   Predicted Return Density   
JavaScript chart by amCharts 3.21.15-1.37-1.01-0.65-0.29-0.01730.220.580.941.3 0.10.20.30.40.5
JavaScript chart by amCharts 3.21.15XLI RSPN
       Returns  

Pair Trading with Industrial Select and Invesco SP

The main advantage of trading using opposite Industrial Select and Invesco SP positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Industrial Select position performs unexpectedly, Invesco SP 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 Invesco SP will offset losses from the drop in Invesco SP's long position.
The idea behind Industrial Select Sector and Invesco SP 500 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.
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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 Aroon Oscillator module to analyze current equity momentum using Aroon Oscillator and other momentum ratios.

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