Correlation Between Utilities Ultrasector and Financials Ultrasector

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

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

Diversification Opportunities for Utilities Ultrasector and Financials Ultrasector

0.72

Correlation Coefficient

Utilities Ultrasector  Financials Ultrasector

Poor diversification

The 3 months correlation between Utilities and Financials is 0.72. Overlapping area represents the amount of risk that can be diversified away by holding Utilities Ultrasector Profund and Financials Ultrasector Profund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Financials Ultrasector and Utilities Ultrasector 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 Utilities Ultrasector Profund are associated (or correlated) with Financials Ultrasector. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Financials Ultrasector has no effect on the direction of Utilities Ultrasector i.e., Utilities Ultrasector and Financials Ultrasector go up and down completely randomly.

Pair Corralation between Utilities Ultrasector and Financials Ultrasector

Assuming the 90 days horizon Utilities Ultrasector Profund is expected to generate 0.71 times more return on investment than Financials Ultrasector. However, Utilities Ultrasector Profund is 1.42 times less risky than Financials Ultrasector. It trades about 0.04 of its potential returns per unit of risk. Financials Ultrasector Profund is currently generating about -0.05 per unit of risk. If you would invest  6,985  in Utilities Ultrasector Profund on January 29, 2025 and sell it today you would earn a total of  228.00  from holding Utilities Ultrasector Profund or generate 3.26% return on investment over 90 days.

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

Utilities Ultrasector Profund  vs.  Financials Ultrasector Profund

Utilities Ultrasector

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Utilities Ultrasector Profund are ranked lower than 2 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong forward indicators, Utilities Ultrasector is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Financials Ultrasector

Risk-Adjusted Performance

Very Weak

Over the last 90 days Financials Ultrasector Profund has generated negative risk-adjusted returns adding no value to fund investors. In spite of latest weak performance, the Fund's forward indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the fund investors.

Pair Trading with Utilities Ultrasector and Financials Ultrasector

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

The idea behind Utilities Ultrasector Profund and Financials Ultrasector Profund 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 Portfolio Suggestion module to get suggestions outside of your existing asset allocation including your own model portfolios.