Correlation Between Health Care and Materials Select

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

Diversification Opportunities for Health Care and Materials Select

HealthMaterialsDiversified AwayHealthMaterialsDiversified Away100%
0.66
  Correlation Coefficient

Poor diversification

The 3 months correlation between Health and Materials is 0.66. Overlapping area represents the amount of risk that can be diversified away by holding Health Care Select and Materials Select Sector in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Materials Select Sector 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 Select are associated (or correlated) with Materials Select. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Materials Select Sector has no effect on the direction of Health Care i.e., Health Care and Materials Select go up and down completely randomly.

Pair Corralation between Health Care and Materials Select

Considering the 90-day investment horizon Health Care Select is expected to generate 0.97 times more return on investment than Materials Select. However, Health Care Select is 1.03 times less risky than Materials Select. It trades about 0.09 of its potential returns per unit of risk. Materials Select Sector is currently generating about -0.06 per unit of risk. If you would invest  14,431  in Health Care Select on November 25, 2024 and sell it today you would earn a total of  212.00  from holding Health Care Select or generate 1.47% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthSignificant
Accuracy100.0%
ValuesDaily Returns

Health Care Select  vs.  Materials Select Sector

 Performance 
JavaScript chart by amCharts 3.21.15Dec2025Feb -10-8-6-4-2024
JavaScript chart by amCharts 3.21.15XLV XLB
       Timeline  
Health Care Select 

Risk-Adjusted Performance

Weak

 
Weak
 
Strong
Compared to the overall equity markets, risk-adjusted returns on investments in Health Care Select are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. In spite of fairly stable essential indicators, Health Care is not utilizing all of its potentials. The latest stock price fuss, may contribute to near-short-term losses for the sophisticated investors.
JavaScript chart by amCharts 3.21.15DecJanFebJanFeb136138140142144146148
Materials Select Sector 

Risk-Adjusted Performance

Very Weak

 
Weak
 
Strong
Over the last 90 days Materials Select Sector has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest inconsistent performance, the Etf's essential indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the ETF investors.
JavaScript chart by amCharts 3.21.15DecJanFebJanFeb848688909294

Health Care and Materials Select Volatility Contrast

   Predicted Return Density   
JavaScript chart by amCharts 3.21.15-2.57-1.92-1.28-0.630.00.651.31.962.62 0.10.20.30.40.50.6
JavaScript chart by amCharts 3.21.15XLV XLB
       Returns  

Pair Trading with Health Care and Materials Select

The main advantage of trading using opposite Health Care and Materials Select positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Health Care position performs unexpectedly, Materials Select 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 Materials Select will offset losses from the drop in Materials Select's long position.
The idea behind Health Care Select and Materials Select Sector 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 Global Markets Map module to get a quick overview of global market snapshot using zoomable world map. Drill down to check world indexes.

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