Correlation Between Materials Select and Health Care

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

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

Diversification Opportunities for Materials Select and Health Care

0.1

Correlation Coefficient

Materials Select  Health Care

Average diversification

The 3 months correlation between Materials and Health is 0.1. Overlapping area represents the amount of risk that can be diversified away by holding Materials Select Sector and Health Care Select in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Health Care Select and Materials 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 Materials Select Sector are associated (or correlated) with Health Care. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Health Care Select has no effect on the direction of Materials Select i.e., Materials Select and Health Care go up and down completely randomly.

Pair Corralation between Materials Select and Health Care

Considering the 90-day investment horizon Materials Select Sector is expected to under-perform the Health Care. In addition to that, Materials Select is 1.4 times more volatile than Health Care Select. It trades about -0.2 of its total potential returns per unit of risk. Health Care Select is currently generating about -0.13 per unit of volatility. If you would invest  14,322  in Health Care Select on February 5, 2024 and sell it today you would lose (239.00) from holding Health Care Select or give up 1.67% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Insignificant
Accuracy	100.0%
Values	Daily Returns

Materials Select Sector  vs.  Health Care Select

Materials Select Sector

Risk-Adjusted Performance

16 of 100

Solid

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

Health Care Select

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Health Care Select has generated negative risk-adjusted returns adding no value to investors with long positions. 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.

Pair Trading with Materials Select and Health Care

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

The idea behind Materials Select Sector and Health Care Select 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 Equity Valuation module to check real value of public entities based on technical and fundamental data.