Correlation Between IShares Core and Overlay Shares

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

By analyzing existing cross correlation between iShares Core SP and Overlay Shares Hedged, you can compare the effects of market volatilities on IShares Core and Overlay Shares 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 Core with a short position of Overlay Shares. Check out your portfolio center. Please also check ongoing floating volatility patterns of IShares Core and Overlay Shares.

Diversification Opportunities for IShares Core and Overlay Shares

0.99

Correlation Coefficient

IShares Core  Overlay Shares

No risk reduction

The 3 months correlation between IShares and Overlay is 0.99. Overlapping area represents the amount of risk that can be diversified away by holding iShares Core SP and Overlay Shares Hedged in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Overlay Shares Hedged and IShares Core 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 Core SP are associated (or correlated) with Overlay Shares. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Overlay Shares Hedged has no effect on the direction of IShares Core i.e., IShares Core and Overlay Shares go up and down completely randomly.

Pair Corralation between IShares Core and Overlay Shares

Considering the 90-day investment horizon iShares Core SP is expected to under-perform the Overlay Shares. In addition to that, IShares Core is 1.75 times more volatile than Overlay Shares Hedged. It trades about -0.08 of its total potential returns per unit of risk. Overlay Shares Hedged is currently generating about -0.09 per unit of volatility. If you would invest  3,426  in Overlay Shares Hedged on December 29, 2024 and sell it today you would lose (118.00) from holding Overlay Shares Hedged or give up 3.44% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Strong
Accuracy	98.39%
Values	Daily Returns

iShares Core SP  vs.  Overlay Shares Hedged

iShares Core SP

Risk-Adjusted Performance

Very Weak

Over the last 90 days iShares Core SP has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly stable basic indicators, IShares Core is not utilizing all of its potentials. The recent stock price fuss, may contribute to near-short-term losses for the sophisticated investors.

Overlay Shares Hedged

Risk-Adjusted Performance

Very Weak

Over the last 90 days Overlay Shares Hedged has generated negative risk-adjusted returns adding no value to investors with long positions. Despite fairly strong essential indicators, Overlay Shares is not utilizing all of its potentials. The recent stock price confusion, may contribute to short-horizon losses for the traders.

Pair Trading with IShares Core and Overlay Shares

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

The idea behind iShares Core SP and Overlay Shares Hedged 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 ETF Categories module to list of ETF categories grouped based on various criteria, such as the investment strategy or type of investments.