Correlation Between Materials Select and Select STOXX

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

By analyzing existing cross correlation between Materials Select Sector and Select STOXX Europe, you can compare the effects of market volatilities on Materials Select and Select STOXX 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 Materials Select with a short position of Select STOXX. Check out your portfolio center. Please also check ongoing floating volatility patterns of Materials Select and Select STOXX.

Diversification Opportunities for Materials Select and Select STOXX

0.1

Correlation Coefficient

Materials Select  Select STOXX

Average diversification

The 3 months correlation between Materials and Select is 0.1. Overlapping area represents the amount of risk that can be diversified away by holding Materials Select Sector and Select STOXX Europe in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Select STOXX Europe and Materials Select 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 Materials Select Sector are associated (or correlated) with Select STOXX. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Select STOXX Europe has no effect on the direction of Materials Select i.e., Materials Select and Select STOXX go up and down completely randomly.

Pair Corralation between Materials Select and Select STOXX

Considering the 90-day investment horizon Materials Select Sector is expected to under-perform the Select STOXX. But the etf apears to be less risky and, when comparing its historical volatility, Materials Select Sector is 1.79 times less risky than Select STOXX. The etf trades about -0.32 of its potential returns per unit of risk. The Select STOXX Europe is currently generating about -0.05 of returns per unit of risk over similar time horizon. If you would invest  2,518  in Select STOXX Europe on August 17, 2024 and sell it today you would lose (34.00) from holding Select STOXX Europe or give up 1.35% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Insignificant
Accuracy	81.82%
Values	Daily Returns

Materials Select Sector  vs.  Select STOXX Europe

Materials Select Sector

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Materials Select Sector are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. Despite somewhat strong essential indicators, Materials Select is not utilizing all of its potentials. The recent stock price disturbance, may contribute to short-term losses for the investors.

Select STOXX Europe

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Select STOXX Europe has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound basic indicators, Select STOXX is not utilizing all of its potentials. The current stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with Materials Select and Select STOXX

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

The idea behind Materials Select Sector and Select STOXX Europe 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.