Correlation Between Financial Industries and Stock Index

Can any of the company-specific risk be diversified away by investing in both Financial Industries and Stock Index 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 Stock Index 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 Stock Index Fund, you can compare the effects of market volatilities on Financial Industries and Stock Index 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 Stock Index. Check out your portfolio center. Please also check ongoing floating volatility patterns of Financial Industries and Stock Index.

Diversification Opportunities for Financial Industries and Stock Index

0.93

Correlation Coefficient

Financial Industries  Stock Index

Almost no diversification

The 3 months correlation between Financial and Stock is 0.93. Overlapping area represents the amount of risk that can be diversified away by holding Financial Industries Fund and Stock Index Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Stock Index Fund 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 Stock Index. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Stock Index Fund has no effect on the direction of Financial Industries i.e., Financial Industries and Stock Index go up and down completely randomly.

Pair Corralation between Financial Industries and Stock Index

Assuming the 90 days horizon Financial Industries is expected to generate 1.43 times less return on investment than Stock Index. In addition to that, Financial Industries is 1.18 times more volatile than Stock Index Fund. It trades about 0.17 of its total potential returns per unit of risk. Stock Index Fund is currently generating about 0.29 per unit of volatility. If you would invest  5,529  in Stock Index Fund on May 1, 2025 and sell it today you would earn a total of  764.00  from holding Stock Index Fund or generate 13.82% return on investment over 90 days.

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

Financial Industries Fund  vs.  Stock Index Fund

Financial Industries

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Financial Industries Fund are ranked lower than 13 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Financial Industries may actually be approaching a critical reversion point that can send shares even higher in August 2025.

Stock Index Fund

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Stock Index Fund are ranked lower than 22 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak forward indicators, Stock Index showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Financial Industries and Stock Index

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

The idea behind Financial Industries Fund and Stock Index 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.

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 AI Portfolio Prophet module to use AI to generate optimal portfolios and find profitable investment opportunities.