Correlation Between Financial Industries and Balanced Strategy

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

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

Diversification Opportunities for Financial Industries and Balanced Strategy

0.77

Correlation Coefficient

Financial Industries  Balanced Strategy

Poor diversification

The 3 months correlation between Financial and Balanced is 0.77. Overlapping area represents the amount of risk that can be diversified away by holding Financial Industries Fund and Balanced Strategy Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Balanced Strategy and Financial Industries 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 Financial Industries Fund are associated (or correlated) with Balanced Strategy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Balanced Strategy has no effect on the direction of Financial Industries i.e., Financial Industries and Balanced Strategy go up and down completely randomly.

Pair Corralation between Financial Industries and Balanced Strategy

Assuming the 90 days horizon Financial Industries is expected to generate 8.95 times less return on investment than Balanced Strategy. In addition to that, Financial Industries is 2.0 times more volatile than Balanced Strategy Fund. It trades about 0.01 of its total potential returns per unit of risk. Balanced Strategy Fund is currently generating about 0.2 per unit of volatility. If you would invest  1,027  in Balanced Strategy Fund on May 13, 2025 and sell it today you would earn a total of  55.00  from holding Balanced Strategy Fund or generate 5.36% return on investment over 90 days.

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

Financial Industries Fund  vs.  Balanced Strategy Fund

Financial Industries

Risk-Adjusted Performance

Weak

Over the last 90 days Financial Industries Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, Financial Industries is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Balanced Strategy

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Balanced Strategy Fund are ranked lower than 16 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong fundamental indicators, Balanced Strategy is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Financial Industries and Balanced Strategy

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

The idea behind Financial Industries Fund and Balanced Strategy Fund 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 Odds Of Bankruptcy module to get analysis of equity chance of financial distress in the next 2 years.