Correlation Between Information Technology and Highlight Tech

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

By analyzing existing cross correlation between Information Technology Total and Highlight Tech, you can compare the effects of market volatilities on Information Technology and Highlight Tech 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 Information Technology with a short position of Highlight Tech. Check out your portfolio center. Please also check ongoing floating volatility patterns of Information Technology and Highlight Tech.

Diversification Opportunities for Information Technology and Highlight Tech

-0.26

Correlation Coefficient

Information Technology  Highlight Tech

Very good diversification

The 3 months correlation between Information and Highlight is -0.26. Overlapping area represents the amount of risk that can be diversified away by holding Information Technology Total and Highlight Tech in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Highlight Tech and Information Technology 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 Information Technology Total are associated (or correlated) with Highlight Tech. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Highlight Tech has no effect on the direction of Information Technology i.e., Information Technology and Highlight Tech go up and down completely randomly.

Pair Corralation between Information Technology and Highlight Tech

Assuming the 90 days trading horizon Information Technology Total is expected to generate 1.77 times more return on investment than Highlight Tech. However, Information Technology is 1.77 times more volatile than Highlight Tech. It trades about 0.08 of its potential returns per unit of risk. Highlight Tech is currently generating about -0.05 per unit of risk. If you would invest  4,515  in Information Technology Total on December 3, 2024 and sell it today you would earn a total of  515.00  from holding Information Technology Total or generate 11.41% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	98.25%
Values	Daily Returns

Information Technology Total  vs.  Highlight Tech

Information Technology

Risk-Adjusted Performance

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Information Technology Total are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. In spite of fairly abnormal basic indicators, Information Technology showed solid returns over the last few months and may actually be approaching a breakup point.

Highlight Tech

Risk-Adjusted Performance

Very Weak

Over the last 90 days Highlight Tech has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly stable basic indicators, Highlight Tech is not utilizing all of its potentials. The latest stock price fuss, may contribute to near-short-term losses for the sophisticated investors.

Pair Trading with Information Technology and Highlight Tech

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

The idea behind Information Technology Total and Highlight Tech 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 Global Correlations module to find global opportunities by holding instruments from different markets.