Correlation Between Global Equity and Financial Industries

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

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

Diversification Opportunities for Global Equity and Financial Industries

0.07

Correlation Coefficient

Global Equity  Financial Industries

Significant diversification

The 3 months correlation between Global and Financial is 0.07. Overlapping area represents the amount of risk that can be diversified away by holding Global Equity Fund and Financial Industries Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Financial Industries and Global Equity 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 Global Equity Fund 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 Global Equity i.e., Global Equity and Financial Industries go up and down completely randomly.

Pair Corralation between Global Equity and Financial Industries

Assuming the 90 days horizon Global Equity Fund is expected to generate 0.62 times more return on investment than Financial Industries. However, Global Equity Fund is 1.61 times less risky than Financial Industries. It trades about 0.06 of its potential returns per unit of risk. Financial Industries Fund is currently generating about 0.0 per unit of risk. If you would invest  1,176  in Global Equity Fund on December 21, 2024 and sell it today you would earn a total of  31.00  from holding Global Equity Fund or generate 2.64% return on investment over 90 days.

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

Global Equity Fund  vs.  Financial Industries Fund

Global Equity

Risk-Adjusted Performance

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Global Equity Fund are ranked lower than 4 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong technical and fundamental indicators, Global Equity is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Financial Industries

Risk-Adjusted Performance

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 Global Equity and Financial Industries

The main advantage of trading using opposite Global Equity and Financial Industries positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Global Equity 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 Global Equity Fund 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.

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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 Odds Of Bankruptcy module to get analysis of equity chance of financial distress in the next 2 years.