Correlation Between Health Care and Asia Pacific

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

By analyzing existing cross correlation between Health Care Ultrasector and Asia Pacific Small, you can compare the effects of market volatilities on Health Care and Asia Pacific 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 Health Care with a short position of Asia Pacific. Check out your portfolio center. Please also check ongoing floating volatility patterns of Health Care and Asia Pacific.

Diversification Opportunities for Health Care and Asia Pacific

0.61

Correlation Coefficient

Health Care  Asia Pacific

Poor diversification

The 3 months correlation between Health and Asia is 0.61. Overlapping area represents the amount of risk that can be diversified away by holding Health Care Ultrasector and Asia Pacific Small in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Asia Pacific Small and Health Care 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 Health Care Ultrasector are associated (or correlated) with Asia Pacific. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Asia Pacific Small has no effect on the direction of Health Care i.e., Health Care and Asia Pacific go up and down completely randomly.

Pair Corralation between Health Care and Asia Pacific

Assuming the 90 days horizon Health Care Ultrasector is expected to generate 1.37 times more return on investment than Asia Pacific. However, Health Care is 1.37 times more volatile than Asia Pacific Small. It trades about 0.16 of its potential returns per unit of risk. Asia Pacific Small is currently generating about 0.07 per unit of risk. If you would invest  9,615  in Health Care Ultrasector on December 19, 2024 and sell it today you would earn a total of  1,090  from holding Health Care Ultrasector or generate 11.34% return on investment over 90 days.

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

Health Care Ultrasector  vs.  Asia Pacific Small

Health Care Ultrasector

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Health Care Ultrasector are ranked lower than 12 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak forward indicators, Health Care may actually be approaching a critical reversion point that can send shares even higher in April 2025.

Asia Pacific Small

Risk-Adjusted Performance

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Asia Pacific Small are ranked lower than 5 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Asia Pacific is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Health Care and Asia Pacific

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

The idea behind Health Care Ultrasector and Asia Pacific Small 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.

Check out your portfolio center.

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 Pair Correlation module to compare performance and examine fundamental relationship between any two equity instruments.