Correlation Between Consumer Discretionary and Industrials Portfolio

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

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

Diversification Opportunities for Consumer Discretionary and Industrials Portfolio

0.93

Correlation Coefficient

Consumer Discretionary  Industrials Portfolio

Almost no diversification

The 3 months correlation between Consumer and Industrials is 0.93. Overlapping area represents the amount of risk that can be diversified away by holding Consumer Discretionary Portfol and Industrials Portfolio Industri in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Industrials Portfolio and Consumer Discretionary 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 Consumer Discretionary Portfolio are associated (or correlated) with Industrials Portfolio. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Industrials Portfolio has no effect on the direction of Consumer Discretionary i.e., Consumer Discretionary and Industrials Portfolio go up and down completely randomly.

Pair Corralation between Consumer Discretionary and Industrials Portfolio

Assuming the 90 days horizon Consumer Discretionary Portfolio is expected to generate 0.99 times more return on investment than Industrials Portfolio. However, Consumer Discretionary Portfolio is 1.01 times less risky than Industrials Portfolio. It trades about 0.24 of its potential returns per unit of risk. Industrials Portfolio Industrials is currently generating about 0.23 per unit of risk. If you would invest  6,065  in Consumer Discretionary Portfolio on September 2, 2024 and sell it today you would earn a total of  1,061  from holding Consumer Discretionary Portfolio or generate 17.49% return on investment over 90 days.

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

Consumer Discretionary Portfol  vs.  Industrials Portfolio Industri

Consumer Discretionary

Risk-Adjusted Performance

19 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Consumer Discretionary Portfolio are ranked lower than 19 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Consumer Discretionary showed solid returns over the last few months and may actually be approaching a breakup point.

Industrials Portfolio

Risk-Adjusted Performance

18 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Industrials Portfolio Industrials are ranked lower than 18 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak forward indicators, Industrials Portfolio showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Consumer Discretionary and Industrials Portfolio

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

The idea behind Consumer Discretionary Portfolio and Industrials Portfolio Industrials 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 Price Transformation module to use Price Transformation models to analyze the depth of different equity instruments across global markets.