Correlation Between Select Sector and Applied Materials
Can any of the company-specific risk be diversified away by investing in both Select Sector and Applied Materials 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 Select Sector and Applied Materials into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between The Select Sector and Applied Materials, you can compare the effects of market volatilities on Select Sector and Applied Materials 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 Select Sector with a short position of Applied Materials. Check out your portfolio center. Please also check ongoing floating volatility patterns of Select Sector and Applied Materials.
Diversification Opportunities for Select Sector and Applied Materials
-0.27 | Correlation Coefficient |
Very good diversification
The 3 months correlation between Select and Applied is -0.27. Overlapping area represents the amount of risk that can be diversified away by holding The Select Sector and Applied Materials in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Applied Materials and Select Sector 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 The Select Sector are associated (or correlated) with Applied Materials. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Applied Materials has no effect on the direction of Select Sector i.e., Select Sector and Applied Materials go up and down completely randomly.
Pair Corralation between Select Sector and Applied Materials
Assuming the 90 days trading horizon The Select Sector is expected to generate 0.59 times more return on investment than Applied Materials. However, The Select Sector is 1.7 times less risky than Applied Materials. It trades about 0.14 of its potential returns per unit of risk. Applied Materials is currently generating about -0.09 per unit of risk. If you would invest 159,394 in The Select Sector on August 28, 2024 and sell it today you would earn a total of 8,082 from holding The Select Sector or generate 5.07% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Against |
| Strength | Insignificant |
| Accuracy | 100.0% |
| Values | Daily Returns |
The Select Sector vs. Applied Materials
Performance |
| Timeline |
| Select Sector |
| Applied Materials |
Select Sector and Applied Materials Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Select Sector and Applied Materials
The main advantage of trading using opposite Select Sector and Applied Materials positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Select Sector position performs unexpectedly, Applied Materials 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 Applied Materials will offset losses from the drop in Applied Materials' long position.The idea behind The Select Sector and Applied Materials 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.| Applied Materials vs. Micron Technology | Applied Materials vs. Capital One Financial | Applied Materials vs. Lloyds Banking Group | Applied Materials vs. DXC Technology |
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 Equity Valuation module to check real value of public entities based on technical and fundamental data.
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