Correlation Between MicroSectors FANG and Invesco Nasdaq

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

By analyzing existing cross correlation between MicroSectors FANG Index and Invesco Nasdaq Biotechnology, you can compare the effects of market volatilities on MicroSectors FANG and Invesco Nasdaq 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 MicroSectors FANG with a short position of Invesco Nasdaq. Check out your portfolio center. Please also check ongoing floating volatility patterns of MicroSectors FANG and Invesco Nasdaq.

Diversification Opportunities for MicroSectors FANG and Invesco Nasdaq

-0.68

Correlation Coefficient

MicroSectors FANG  Invesco Nasdaq

Excellent diversification

The 3 months correlation between MicroSectors and Invesco is -0.68. Overlapping area represents the amount of risk that can be diversified away by holding MicroSectors FANG Index and Invesco Nasdaq Biotechnology in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Invesco Nasdaq Biote and MicroSectors FANG 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 MicroSectors FANG Index are associated (or correlated) with Invesco Nasdaq. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Invesco Nasdaq Biote has no effect on the direction of MicroSectors FANG i.e., MicroSectors FANG and Invesco Nasdaq go up and down completely randomly.

Pair Corralation between MicroSectors FANG and Invesco Nasdaq

Given the investment horizon of 90 days MicroSectors FANG Index is expected to generate 4.14 times more return on investment than Invesco Nasdaq. However, MicroSectors FANG is 4.14 times more volatile than Invesco Nasdaq Biotechnology. It trades about 0.05 of its potential returns per unit of risk. Invesco Nasdaq Biotechnology is currently generating about -0.23 per unit of risk. If you would invest  59,809  in MicroSectors FANG Index on October 7, 2024 and sell it today you would earn a total of  1,655  from holding MicroSectors FANG Index or generate 2.77% return on investment over 90 days.

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

MicroSectors FANG Index  vs.  Invesco Nasdaq Biotechnology

MicroSectors FANG Index

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in MicroSectors FANG Index are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively conflicting technical and fundamental indicators, MicroSectors FANG unveiled solid returns over the last few months and may actually be approaching a breakup point.

Invesco Nasdaq Biote

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Invesco Nasdaq Biotechnology has generated negative risk-adjusted returns adding no value to investors with long positions. Even with relatively invariable fundamental drivers, Invesco Nasdaq is not utilizing all of its potentials. The latest stock price agitation, may contribute to short-term losses for the retail investors.

Pair Trading with MicroSectors FANG and Invesco Nasdaq

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

The idea behind MicroSectors FANG Index and Invesco Nasdaq Biotechnology 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.

Check out your portfolio center.

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 Portfolio Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.