Correlation Between MicroSectors FANG and Invesco DB

Can any of the company-specific risk be diversified away by investing in both MicroSectors FANG and Invesco DB 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 MicroSectors FANG and Invesco DB into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between MicroSectors FANG Index and Invesco DB Oil, you can compare the effects of market volatilities on MicroSectors FANG and Invesco DB 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 MicroSectors FANG with a short position of Invesco DB. Check out your portfolio center. Please also check ongoing floating volatility patterns of MicroSectors FANG and Invesco DB.

Diversification Opportunities for MicroSectors FANG and Invesco DB

-0.4

Correlation Coefficient

MicroSectors FANG  Invesco DB

Very good diversification

The 3 months correlation between MicroSectors and Invesco is -0.4. Overlapping area represents the amount of risk that can be diversified away by holding MicroSectors FANG Index and Invesco DB Oil in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Invesco DB Oil and MicroSectors FANG 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 MicroSectors FANG Index are associated (or correlated) with Invesco DB. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Invesco DB Oil has no effect on the direction of MicroSectors FANG i.e., MicroSectors FANG and Invesco DB go up and down completely randomly.

Pair Corralation between MicroSectors FANG and Invesco DB

Given the investment horizon of 90 days MicroSectors FANG Index is expected to generate 6.09 times more return on investment than Invesco DB. However, MicroSectors FANG is 6.09 times more volatile than Invesco DB Oil. It trades about -0.03 of its potential returns per unit of risk. Invesco DB Oil is currently generating about -0.28 per unit of risk. If you would invest  3,797  in MicroSectors FANG Index on February 4, 2024 and sell it today you would lose (242.00) from holding MicroSectors FANG Index or give up 6.37% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Very Weak
Accuracy	100.0%
Values	Daily Returns

MicroSectors FANG Index  vs.  Invesco DB Oil

MicroSectors FANG Index

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days MicroSectors FANG Index has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest conflicting performance, the Etf's technical and fundamental indicators remain sound and the latest tumult on Wall Street may also be a sign of longer-term gains for the fund shareholders.

Invesco DB Oil

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Invesco DB Oil are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. In spite of very unsteady fundamental drivers, Invesco DB may actually be approaching a critical reversion point that can send shares even higher in June 2024.

Pair Trading with MicroSectors FANG and Invesco DB

The main advantage of trading using opposite MicroSectors FANG and Invesco DB positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if MicroSectors FANG position performs unexpectedly, Invesco DB 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 DB will offset losses from the drop in Invesco DB's long position.

The idea behind MicroSectors FANG Index and Invesco DB Oil 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 AI Portfolio Architect module to use AI to generate optimal portfolios and find profitable investment opportunities.