Correlation Between Health Care and New Economy

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

Diversification Opportunities for Health Care and New Economy

0.66

Correlation Coefficient

Health Care  New Economy

Poor diversification

The 3 months correlation between Health and NEW is 0.66. Overlapping area represents the amount of risk that can be diversified away by holding Health Care Ultrasector and New Economy Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on New Economy Fund 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 New Economy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of New Economy Fund has no effect on the direction of Health Care i.e., Health Care and New Economy go up and down completely randomly.

Pair Corralation between Health Care and New Economy

Assuming the 90 days horizon Health Care Ultrasector is expected to generate 1.27 times more return on investment than New Economy. However, Health Care is 1.27 times more volatile than New Economy Fund. It trades about 0.22 of its potential returns per unit of risk. New Economy Fund is currently generating about 0.22 per unit of risk. If you would invest  10,020  in Health Care Ultrasector on October 27, 2024 and sell it today you would earn a total of  483.00  from holding Health Care Ultrasector or generate 4.82% 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.  New Economy Fund

Health Care Ultrasector

Risk-Adjusted Performance

0 of 100

Very Weak

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

New Economy Fund

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days New Economy Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong technical and fundamental indicators, New Economy 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 New Economy

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

The idea behind Health Care Ultrasector and New Economy Fund 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 Equity Valuation module to check real value of public entities based on technical and fundamental data.