Correlation Between Industrial Select and Financial Select

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

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

Diversification Opportunities for Industrial Select and Financial Select

0.94

Correlation Coefficient

Industrial Select  Financial Select

Almost no diversification

The 3 months correlation between Industrial and Financial is 0.94. Overlapping area represents the amount of risk that can be diversified away by holding Industrial Select Sector and Financial Select Sector in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Financial Select Sector and Industrial 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 Industrial Select Sector are associated (or correlated) with Financial Select. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Financial Select Sector has no effect on the direction of Industrial Select i.e., Industrial Select and Financial Select go up and down completely randomly.

Pair Corralation between Industrial Select and Financial Select

Considering the 90-day investment horizon Industrial Select Sector is expected to generate 0.9 times more return on investment than Financial Select. However, Industrial Select Sector is 1.12 times less risky than Financial Select. It trades about -0.08 of its potential returns per unit of risk. Financial Select Sector is currently generating about -0.16 per unit of risk. If you would invest  12,499  in Industrial Select Sector on January 31, 2024 and sell it today you would lose (151.00) from holding Industrial Select Sector or give up 1.21% of portfolio value over 90 days.

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

Industrial Select Sector  vs.  Financial Select Sector

Industrial Select Sector

Risk-Adjusted Performance

16 of 100

Solid

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

Financial Select Sector

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Financial Select Sector are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable essential indicators, Financial Select is not utilizing all of its potentials. The newest stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with Industrial Select and Financial Select

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

The idea behind Industrial Select Sector and Financial 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.

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 Portfolio Holdings module to check your current holdings and cash postion to detemine if your portfolio needs rebalancing.