Correlation Between IShares 1 and SP Funds

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Can any of the company-specific risk be diversified away by investing in both IShares 1 and SP Funds 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 1 and SP Funds into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between iShares 1 3 Year and SP Funds Dow, you can compare the effects of market volatilities on IShares 1 and SP Funds 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 1 with a short position of SP Funds. Check out your portfolio center. Please also check ongoing floating volatility patterns of IShares 1 and SP Funds.

Diversification Opportunities for IShares 1 and SP Funds

0.26
  Correlation Coefficient

Modest diversification

The 3 months correlation between IShares and SPSK is 0.26. Overlapping area represents the amount of risk that can be diversified away by holding iShares 1 3 Year and SP Funds Dow in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on SP Funds Dow and IShares 1 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 1 3 Year are associated (or correlated) with SP Funds. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of SP Funds Dow has no effect on the direction of IShares 1 i.e., IShares 1 and SP Funds go up and down completely randomly.

Pair Corralation between IShares 1 and SP Funds

Given the investment horizon of 90 days iShares 1 3 Year is expected to under-perform the SP Funds. But the etf apears to be less risky and, when comparing its historical volatility, iShares 1 3 Year is 1.25 times less risky than SP Funds. The etf trades about -0.36 of its potential returns per unit of risk. The SP Funds Dow is currently generating about -0.28 of returns per unit of risk over similar time horizon. If you would invest  1,822  in SP Funds Dow on October 6, 2024 and sell it today you would lose (52.00) from holding SP Funds Dow or give up 2.85% of portfolio value over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthVery Weak
Accuracy95.24%
ValuesDaily Returns

iShares 1 3 Year  vs.  SP Funds Dow

 Performance 
       Timeline  
iShares 1 3 

Risk-Adjusted Performance

0 of 100

 
Weak
 
Strong
Very Weak
Over the last 90 days iShares 1 3 Year has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable technical indicators, IShares 1 is not utilizing all of its potentials. The latest stock price disturbance, may contribute to mid-run losses for the stockholders.
SP Funds Dow 

Risk-Adjusted Performance

0 of 100

 
Weak
 
Strong
Very Weak
Over the last 90 days SP Funds Dow has generated negative risk-adjusted returns adding no value to investors with long positions. Despite quite persistent basic indicators, SP Funds is not utilizing all of its potentials. The current stock price mess, may contribute to short-term losses for the institutional investors.

IShares 1 and SP Funds Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with IShares 1 and SP Funds

The main advantage of trading using opposite IShares 1 and SP Funds positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if IShares 1 position performs unexpectedly, SP Funds 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 SP Funds will offset losses from the drop in SP Funds' long position.
The idea behind iShares 1 3 Year and SP Funds Dow 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.
The effect of pair diversification on risk is to reduce it, but we should note this doesn't apply to all risk types. When we trade pairs against SP Funds as a counterpart, there is always some inherent risk that will never be diversified away no matter what. This volatility limits the effect of tactical diversification using pair trading. SP Funds' systematic risk is the inherent uncertainty of the entire market, and therefore cannot be mitigated even by pair-trading it against the equity that is not highly correlated to it. On the other hand, SP Funds' unsystematic risk describes the types of risk that we can protect against, at least to some degree, by selecting a matching pair that is not perfectly correlated to SP Funds Dow.
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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 Fundamental Analysis module to view fundamental data based on most recent published financial statements.

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