Correlation Between Consumer Finance and Consumer Discretionary

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

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

Diversification Opportunities for Consumer Finance and Consumer Discretionary

0.93

Correlation Coefficient

Consumer Finance  Consumer Discretionary

Almost no diversification

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

Pair Corralation between Consumer Finance and Consumer Discretionary

Assuming the 90 days horizon Consumer Finance Portfolio is expected to generate 1.33 times more return on investment than Consumer Discretionary. However, Consumer Finance is 1.33 times more volatile than Consumer Discretionary Portfolio. It trades about 0.38 of its potential returns per unit of risk. Consumer Discretionary Portfolio is currently generating about 0.5 per unit of risk. If you would invest  1,797  in Consumer Finance Portfolio on September 1, 2024 and sell it today you would earn a total of  213.00  from holding Consumer Finance Portfolio or generate 11.85% return on investment over 90 days.

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

Consumer Finance Portfolio  vs.  Consumer Discretionary Portfol

Consumer Finance Por

Risk-Adjusted Performance

18 of 100

Solid

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

Consumer Discretionary

Risk-Adjusted Performance

18 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Consumer Discretionary Portfolio are ranked lower than 18 (%) 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.

Pair Trading with Consumer Finance and Consumer Discretionary

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

The idea behind Consumer Finance Portfolio and Consumer Discretionary 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 Investing Opportunities module to build portfolios using our predefined set of ideas and optimize them against your investing preferences.