Correlation Between International Equity and Financial Services

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

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

Diversification Opportunities for International Equity and Financial Services

0.84

Correlation Coefficient

International Equity  Financial Services

Very poor diversification

The 3 months correlation between International and Financial is 0.84. Overlapping area represents the amount of risk that can be diversified away by holding International Equity Portfolio and Financial Services Portfolio in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Financial Services and International Equity 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 International Equity Portfolio are associated (or correlated) with Financial Services. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Financial Services has no effect on the direction of International Equity i.e., International Equity and Financial Services go up and down completely randomly.

Pair Corralation between International Equity and Financial Services

Assuming the 90 days horizon International Equity is expected to generate 1.08 times less return on investment than Financial Services. But when comparing it to its historical volatility, International Equity Portfolio is 1.23 times less risky than Financial Services. It trades about 0.12 of its potential returns per unit of risk. Financial Services Portfolio is currently generating about 0.1 of returns per unit of risk over similar time horizon. If you would invest  1,169  in Financial Services Portfolio on May 5, 2025 and sell it today you would earn a total of  66.00  from holding Financial Services Portfolio or generate 5.65% return on investment over 90 days.

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

International Equity Portfolio  vs.  Financial Services Portfolio

International Equity

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in International Equity Portfolio are ranked lower than 9 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong fundamental indicators, International Equity is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Financial Services

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Financial Services Portfolio are ranked lower than 8 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong forward indicators, Financial Services is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with International Equity and Financial Services

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

The idea behind International Equity Portfolio and Financial Services Portfolio 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 Watchlist Optimization module to optimize watchlists to build efficient portfolios or rebalance existing positions based on the mean-variance optimization algorithm.