Correlation Between IShares Biotechnology and Consumer Discretionary

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

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

Diversification Opportunities for IShares Biotechnology and Consumer Discretionary

0.37

Correlation Coefficient

IShares Biotechnology  Consumer Discretionary

Weak diversification

The 3 months correlation between IShares and Consumer is 0.37. Overlapping area represents the amount of risk that can be diversified away by holding iShares Biotechnology ETF and Consumer Discretionary Select in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Consumer Discretionary and IShares Biotechnology 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 iShares Biotechnology ETF 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 IShares Biotechnology i.e., IShares Biotechnology and Consumer Discretionary go up and down completely randomly.

Pair Corralation between IShares Biotechnology and Consumer Discretionary

Considering the 90-day investment horizon iShares Biotechnology ETF is expected to generate 0.78 times more return on investment than Consumer Discretionary. However, iShares Biotechnology ETF is 1.29 times less risky than Consumer Discretionary. It trades about -0.01 of its potential returns per unit of risk. Consumer Discretionary Select is currently generating about -0.15 per unit of risk. If you would invest  13,155  in iShares Biotechnology ETF on December 29, 2024 and sell it today you would lose (126.00) from holding iShares Biotechnology ETF or give up 0.96% of portfolio value over 90 days.

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

iShares Biotechnology ETF  vs.  Consumer Discretionary Select

iShares Biotechnology ETF

Risk-Adjusted Performance

Very Weak

Over the last 90 days iShares Biotechnology ETF has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong fundamental drivers, IShares Biotechnology is not utilizing all of its potentials. The latest stock price disturbance, may contribute to short-term losses for the investors.

Consumer Discretionary

Risk-Adjusted Performance

Very Weak

Over the last 90 days Consumer Discretionary Select has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of weak performance in the last few months, the Etf's essential indicators remain fairly strong which may send shares a bit higher in April 2025. The current disturbance may also be a sign of long term up-swing for the ETF investors.

Pair Trading with IShares Biotechnology and Consumer Discretionary

The main advantage of trading using opposite IShares Biotechnology and Consumer Discretionary positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if IShares Biotechnology 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 iShares Biotechnology ETF and Consumer Discretionary Select 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 Price Exposure Probability module to analyze equity upside and downside potential for a given time horizon across multiple markets.