Correlation Between Utilities Select and Energy Select

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

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

Diversification Opportunities for Utilities Select and Energy Select

0.36

Correlation Coefficient

Utilities Select  Energy Select

Weak diversification

The 3 months correlation between Utilities and Energy is 0.36. Overlapping area represents the amount of risk that can be diversified away by holding Utilities Select Sector and Energy Select Sector in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Energy Select Sector and Utilities 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 Utilities Select Sector are associated (or correlated) with Energy Select. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Energy Select Sector has no effect on the direction of Utilities Select i.e., Utilities Select and Energy Select go up and down completely randomly.

Pair Corralation between Utilities Select and Energy Select

Considering the 90-day investment horizon Utilities Select is expected to generate 1.07 times less return on investment than Energy Select. But when comparing it to its historical volatility, Utilities Select Sector is 1.25 times less risky than Energy Select. It trades about 0.04 of its potential returns per unit of risk. Energy Select Sector is currently generating about 0.04 of returns per unit of risk over similar time horizon. If you would invest  7,948  in Energy Select Sector on August 27, 2024 and sell it today you would earn a total of  1,779  from holding Energy Select Sector or generate 22.38% return on investment over 90 days.

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

Utilities Select Sector  vs.  Energy Select Sector

Utilities Select Sector

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Utilities Select Sector are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively weak essential indicators, Utilities Select may actually be approaching a critical reversion point that can send shares even higher in December 2024.

Energy Select Sector

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Energy Select Sector are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of rather fragile essential indicators, Energy Select may actually be approaching a critical reversion point that can send shares even higher in December 2024.

Pair Trading with Utilities Select and Energy Select

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

The idea behind Utilities Select Sector and Energy Select Sector 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 Price Ceiling Movement module to calculate and plot Price Ceiling Movement for different equity instruments.