Correlation Between MicroSectors FANG and IShares

Can any of the company-specific risk be diversified away by investing in both MicroSectors FANG and IShares 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 IShares 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 IShares, you can compare the effects of market volatilities on MicroSectors FANG and IShares 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 IShares. Check out your portfolio center. Please also check ongoing floating volatility patterns of MicroSectors FANG and IShares.

Diversification Opportunities for MicroSectors FANG and IShares

0.85

Correlation Coefficient

MicroSectors FANG  IShares

Very poor diversification

The 3 months correlation between MicroSectors and IShares is 0.85. Overlapping area represents the amount of risk that can be diversified away by holding MicroSectors FANG Index and IShares in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on IShares 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 IShares. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of IShares has no effect on the direction of MicroSectors FANG i.e., MicroSectors FANG and IShares go up and down completely randomly.

Pair Corralation between MicroSectors FANG and IShares

Given the investment horizon of 90 days MicroSectors FANG Index is expected to generate 28.79 times more return on investment than IShares. However, MicroSectors FANG is 28.79 times more volatile than IShares. It trades about 0.52 of its potential returns per unit of risk. IShares is currently generating about -0.08 per unit of risk. If you would invest  48,556  in MicroSectors FANG Index on September 18, 2024 and sell it today you would earn a total of  20,944  from holding MicroSectors FANG Index or generate 43.13% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	55.0%
Values	Daily Returns

MicroSectors FANG Index  vs.  IShares

MicroSectors FANG Index

Risk-Adjusted Performance

20 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in MicroSectors FANG Index are ranked lower than 20 (%) 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.

IShares

Risk-Adjusted Performance

0 of 100

Modest

Over the last 90 days IShares has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy primary indicators, IShares is not utilizing all of its potentials. The latest stock price disarray, may contribute to short-term losses for the investors.

Pair Trading with MicroSectors FANG and IShares

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

The idea behind MicroSectors FANG Index and IShares 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 Portfolio Diagnostics module to use generated alerts and portfolio events aggregator to diagnose current holdings.