Correlation Between Consumer Discretionary and Consumer Finance

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

Diversification Opportunities for Consumer Discretionary and Consumer Finance

0.2

Correlation Coefficient

Consumer Discretionary  Consumer Finance

Modest diversification

The 3 months correlation between Consumer and Consumer is 0.2. Overlapping area represents the amount of risk that can be diversified away by holding Consumer Discretionary Portfol and Consumer Finance Portfolio in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Consumer Finance Por 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 Consumer Finance. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Consumer Finance Por has no effect on the direction of Consumer Discretionary i.e., Consumer Discretionary and Consumer Finance go up and down completely randomly.

Pair Corralation between Consumer Discretionary and Consumer Finance

Assuming the 90 days horizon Consumer Discretionary Portfolio is expected to under-perform the Consumer Finance. In addition to that, Consumer Discretionary is 1.27 times more volatile than Consumer Finance Portfolio. It trades about -0.11 of its total potential returns per unit of risk. Consumer Finance Portfolio is currently generating about -0.01 per unit of volatility. If you would invest  2,011  in Consumer Finance Portfolio on November 30, 2024 and sell it today you would lose (15.00) from holding Consumer Finance Portfolio or give up 0.75% of portfolio value over 90 days.

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

Consumer Discretionary Portfol  vs.  Consumer Finance Portfolio

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.

Consumer Finance Por

Risk-Adjusted Performance

Very Weak

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

Pair Trading with Consumer Discretionary and Consumer Finance

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

The idea behind Consumer Discretionary Portfolio and Consumer Finance 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 Competition Analyzer module to analyze and compare many basic indicators for a group of related or unrelated entities.