Correlation Between Financials Ultrasector and Materials Portfolio

Can any of the company-specific risk be diversified away by investing in both Financials Ultrasector and Materials Portfolio 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 Financials Ultrasector and Materials Portfolio into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Financials Ultrasector Profund and Materials Portfolio Fidelity, you can compare the effects of market volatilities on Financials Ultrasector and Materials Portfolio 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 Financials Ultrasector with a short position of Materials Portfolio. Check out your portfolio center. Please also check ongoing floating volatility patterns of Financials Ultrasector and Materials Portfolio.

Diversification Opportunities for Financials Ultrasector and Materials Portfolio

0.02

Correlation Coefficient

Financials Ultrasector  Materials Portfolio

Significant diversification

The 3 months correlation between Financials and Materials is 0.02. Overlapping area represents the amount of risk that can be diversified away by holding Financials Ultrasector Profund and Materials Portfolio Fidelity in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Materials Portfolio and Financials Ultrasector 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 Financials Ultrasector Profund are associated (or correlated) with Materials Portfolio. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Materials Portfolio has no effect on the direction of Financials Ultrasector i.e., Financials Ultrasector and Materials Portfolio go up and down completely randomly.

Pair Corralation between Financials Ultrasector and Materials Portfolio

Assuming the 90 days horizon Financials Ultrasector Profund is expected to generate 1.22 times more return on investment than Materials Portfolio. However, Financials Ultrasector is 1.22 times more volatile than Materials Portfolio Fidelity. It trades about 0.06 of its potential returns per unit of risk. Materials Portfolio Fidelity is currently generating about -0.01 per unit of risk. If you would invest  2,780  in Financials Ultrasector Profund on October 4, 2024 and sell it today you would earn a total of  1,364  from holding Financials Ultrasector Profund or generate 49.06% return on investment over 90 days.

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

Financials Ultrasector Profund  vs.  Materials Portfolio Fidelity

Financials Ultrasector

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Financials Ultrasector Profund are ranked lower than 4 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak forward indicators, Financials Ultrasector may actually be approaching a critical reversion point that can send shares even higher in February 2025.

Materials Portfolio

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Materials Portfolio Fidelity has generated negative risk-adjusted returns adding no value to fund investors. In spite of weak performance in the last few months, the Fund's technical and 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 Financials Ultrasector and Materials Portfolio

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

The idea behind Financials Ultrasector Profund and Materials Portfolio Fidelity 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 Fundamentals Comparison module to compare fundamentals across multiple equities to find investing opportunities.