Correlation Between Financial Industries and Global Growth

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

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

Diversification Opportunities for Financial Industries and Global Growth

0.5

Correlation Coefficient

Financial Industries  Global Growth

Very weak diversification

The 3 months correlation between Financial and Global is 0.5. Overlapping area represents the amount of risk that can be diversified away by holding Financial Industries Fund and Global Growth Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Global Growth and Financial Industries 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 Financial Industries Fund are associated (or correlated) with Global Growth. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Global Growth has no effect on the direction of Financial Industries i.e., Financial Industries and Global Growth go up and down completely randomly.

Pair Corralation between Financial Industries and Global Growth

Assuming the 90 days horizon Financial Industries Fund is expected to generate 0.44 times more return on investment than Global Growth. However, Financial Industries Fund is 2.27 times less risky than Global Growth. It trades about -0.3 of its potential returns per unit of risk. Global Growth Fund is currently generating about -0.25 per unit of risk. If you would invest  2,058  in Financial Industries Fund on October 9, 2024 and sell it today you would lose (240.00) from holding Financial Industries Fund or give up 11.66% of portfolio value over 90 days.

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

Financial Industries Fund  vs.  Global Growth Fund

Financial Industries

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Financial Industries Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, Financial Industries is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Global Growth

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Global Growth Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of abnormal performance in the last few months, the Fund's fundamental indicators remain fairly strong which may send shares a bit higher in February 2025. The current disturbance may also be a sign of long term up-swing for the fund investors.

Pair Trading with Financial Industries and Global Growth

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

The idea behind Financial Industries Fund and Global Growth Fund 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 ETFs module to find actively traded Exchange Traded Funds (ETF) from around the world.