Correlation Between Financial Services and Consumer Discretionary

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

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

Diversification Opportunities for Financial Services and Consumer Discretionary

0.51

Correlation Coefficient

Financial Services  Consumer Discretionary

Very weak diversification

The 3 months correlation between FINANCIAL and Consumer is 0.51. Overlapping area represents the amount of risk that can be diversified away by holding Financial Services Portfolio and Consumer Discretionary Portfol in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Consumer Discretionary and Financial Services 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 Services Portfolio are associated (or correlated) with Consumer Discretionary. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Consumer Discretionary has no effect on the direction of Financial Services i.e., Financial Services and Consumer Discretionary go up and down completely randomly.

Pair Corralation between Financial Services and Consumer Discretionary

Assuming the 90 days horizon Financial Services Portfolio is expected to generate 0.72 times more return on investment than Consumer Discretionary. However, Financial Services Portfolio is 1.38 times less risky than Consumer Discretionary. It trades about -0.09 of its potential returns per unit of risk. Consumer Discretionary Portfolio is currently generating about -0.11 per unit of risk. If you would invest  1,638  in Financial Services Portfolio on December 1, 2024 and sell it today you would lose (97.00) from holding Financial Services Portfolio or give up 5.92% of portfolio value over 90 days.

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

Financial Services Portfolio  vs.  Consumer Discretionary Portfol

Financial Services

Risk-Adjusted Performance

Very Weak

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

Consumer Discretionary

Risk-Adjusted Performance

Very Weak

Over the last 90 days Consumer Discretionary Portfolio has generated negative risk-adjusted returns adding no value to fund investors. In spite of latest weak performance, the Fund's basic 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 Financial Services and Consumer Discretionary

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

The idea behind Financial Services Portfolio and Consumer Discretionary Portfolio 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 Bollinger Bands module to use Bollinger Bands indicator to analyze target price for a given investing horizon.