Correlation Between Health Care and Defense

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

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

Diversification Opportunities for Health Care and Defense

-0.9

Correlation Coefficient

Health Care  Defense

Pay attention - limited upside

The 3 months correlation between Health and Defense is -0.9. Overlapping area represents the amount of risk that can be diversified away by holding Health Care Services and Defense And Aerospace in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Defense And Aerospace and Health Care 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 Health Care Services are associated (or correlated) with Defense. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Defense And Aerospace has no effect on the direction of Health Care i.e., Health Care and Defense go up and down completely randomly.

Pair Corralation between Health Care and Defense

Assuming the 90 days horizon Health Care Services is expected to under-perform the Defense. In addition to that, Health Care is 1.78 times more volatile than Defense And Aerospace. It trades about -0.23 of its total potential returns per unit of risk. Defense And Aerospace is currently generating about 0.35 per unit of volatility. If you would invest  2,008  in Defense And Aerospace on May 4, 2025 and sell it today you would earn a total of  412.00  from holding Defense And Aerospace or generate 20.52% return on investment over 90 days.

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

Health Care Services  vs.  Defense And Aerospace

Health Care Services

Risk-Adjusted Performance

Very Weak

Over the last 90 days Health Care Services has generated negative risk-adjusted returns adding no value to fund investors. In spite of weak performance in the last few months, the Fund's fundamental indicators remain fairly strong which may send shares a bit higher in September 2025. The current disturbance may also be a sign of long term up-swing for the fund investors.

Defense And Aerospace

Risk-Adjusted Performance

Strong

Compared to the overall equity markets, risk-adjusted returns on investments in Defense And Aerospace are ranked lower than 27 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Defense showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Health Care and Defense

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

The idea behind Health Care Services and Defense And Aerospace 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 Instant Ratings module to determine any equity ratings based on digital recommendations. Macroaxis instant equity ratings are based on combination of fundamental analysis and risk-adjusted market performance.