Correlation Between SPDR SP and Energy Select

Can any of the company-specific risk be diversified away by investing in both SPDR SP and Energy 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 SPDR SP and Energy Select into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between SPDR SP Insurance and Energy Select Sector, you can compare the effects of market volatilities on SPDR SP and Energy 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 SPDR SP with a short position of Energy Select. Check out your portfolio center. Please also check ongoing floating volatility patterns of SPDR SP and Energy Select.

Diversification Opportunities for SPDR SP and Energy Select

0.65

Correlation Coefficient

SPDR SP  Energy Select

Poor diversification

The 3 months correlation between SPDR and Energy is 0.65. Overlapping area represents the amount of risk that can be diversified away by holding SPDR SP Insurance and Energy Select Sector in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Energy Select Sector and SPDR SP 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 SPDR SP Insurance are associated (or correlated) with Energy Select. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Energy Select Sector has no effect on the direction of SPDR SP i.e., SPDR SP and Energy Select go up and down completely randomly.

Pair Corralation between SPDR SP and Energy Select

Considering the 90-day investment horizon SPDR SP Insurance is expected to generate 0.74 times more return on investment than Energy Select. However, SPDR SP Insurance is 1.34 times less risky than Energy Select. It trades about 0.13 of its potential returns per unit of risk. Energy Select Sector is currently generating about 0.08 per unit of risk. If you would invest  4,311  in SPDR SP Insurance on February 1, 2024 and sell it today you would earn a total of  547.00  from holding SPDR SP Insurance or generate 12.69% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	99.19%
Values	Daily Returns

SPDR SP Insurance  vs.  Energy Select Sector

SPDR SP Insurance

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in SPDR SP Insurance are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound forward indicators, SPDR SP is not utilizing all of its potentials. The newest stock price tumult, may contribute to shorter-term losses for the shareholders.

Energy Select Sector

Risk-Adjusted Performance

16 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Energy Select Sector are ranked lower than 16 (%) of all global equities and portfolios over the last 90 days. In spite of rather abnormal essential indicators, Energy Select may actually be approaching a critical reversion point that can send shares even higher in June 2024.

Pair Trading with SPDR SP and Energy Select

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

The idea behind SPDR SP Insurance and Energy 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 Idea Breakdown module to analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes.