Correlation Between Rational Defensive and Financial Industries

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

By analyzing existing cross correlation between Rational Defensive Growth and Financial Industries Fund, you can compare the effects of market volatilities on Rational Defensive and Financial Industries 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 Rational Defensive with a short position of Financial Industries. Check out your portfolio center. Please also check ongoing floating volatility patterns of Rational Defensive and Financial Industries.

Diversification Opportunities for Rational Defensive and Financial Industries

0.39

Correlation Coefficient

Rational Defensive  Financial Industries

Weak diversification

The 3 months correlation between Rational and Financial is 0.39. Overlapping area represents the amount of risk that can be diversified away by holding Rational Defensive Growth and Financial Industries Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Financial Industries and Rational Defensive 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 Rational Defensive Growth are associated (or correlated) with Financial Industries. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Financial Industries has no effect on the direction of Rational Defensive i.e., Rational Defensive and Financial Industries go up and down completely randomly.

Pair Corralation between Rational Defensive and Financial Industries

Assuming the 90 days horizon Rational Defensive Growth is expected to generate 0.56 times more return on investment than Financial Industries. However, Rational Defensive Growth is 1.77 times less risky than Financial Industries. It trades about -0.1 of its potential returns per unit of risk. Financial Industries Fund is currently generating about -0.29 per unit of risk. If you would invest  4,127  in Rational Defensive Growth on October 10, 2024 and sell it today you would lose (98.00) from holding Rational Defensive Growth or give up 2.37% of portfolio value over 90 days.

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

Rational Defensive Growth  vs.  Financial Industries Fund

Rational Defensive Growth

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Rational Defensive Growth are ranked lower than 8 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Rational Defensive may actually be approaching a critical reversion point that can send shares even higher in February 2025.

Financial Industries

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with Rational Defensive and Financial Industries

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

The idea behind Rational Defensive Growth and Financial Industries 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.

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 Share Portfolio module to track or share privately all of your investments from the convenience of any device.