Correlation Between IShares Basic and Energy Select

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

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

Diversification Opportunities for IShares Basic and Energy Select

0.14

Correlation Coefficient

IShares Basic  Energy Select

Average diversification

The 3 months correlation between IShares and Energy is 0.14. Overlapping area represents the amount of risk that can be diversified away by holding iShares Basic Materials and Energy Select Sector in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Energy Select Sector and IShares Basic 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 Basic Materials are associated (or correlated) with Energy Select. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Energy Select Sector has no effect on the direction of IShares Basic i.e., IShares Basic and Energy Select go up and down completely randomly.

Pair Corralation between IShares Basic and Energy Select

Considering the 90-day investment horizon IShares Basic is expected to generate 9.97 times less return on investment than Energy Select. But when comparing it to its historical volatility, iShares Basic Materials is 1.38 times less risky than Energy Select. It trades about 0.01 of its potential returns per unit of risk. Energy Select Sector is currently generating about 0.09 of returns per unit of risk over similar time horizon. If you would invest  8,441  in Energy Select Sector on September 12, 2024 and sell it today you would earn a total of  573.00  from holding Energy Select Sector or generate 6.79% return on investment over 90 days.

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

iShares Basic Materials  vs.  Energy Select Sector

iShares Basic Materials

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in iShares Basic Materials are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy basic indicators, IShares Basic is not utilizing all of its potentials. The recent stock price disarray, may contribute to short-term losses for the investors.

Energy Select Sector

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Energy Select Sector are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of rather fragile essential indicators, Energy Select may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with IShares Basic and Energy Select

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

The idea behind iShares Basic Materials and Energy Select Sector 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 Transformation module to use Price Transformation models to analyze the depth of different equity instruments across global markets.