Correlation Between Large Cap and Financials Ultrasector

Can any of the company-specific risk be diversified away by investing in both Large Cap and Financials Ultrasector 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 Large Cap and Financials Ultrasector into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Large Cap Growth Profund and Financials Ultrasector Profund, you can compare the effects of market volatilities on Large Cap and Financials Ultrasector 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 Large Cap with a short position of Financials Ultrasector. Check out your portfolio center. Please also check ongoing floating volatility patterns of Large Cap and Financials Ultrasector.

Diversification Opportunities for Large Cap and Financials Ultrasector

0.72

Correlation Coefficient

Large Cap  Financials Ultrasector

Poor diversification

The 3 months correlation between Large and Financials is 0.72. Overlapping area represents the amount of risk that can be diversified away by holding Large Cap Growth Profund and Financials Ultrasector Profund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Financials Ultrasector and Large Cap 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 Large Cap Growth Profund are associated (or correlated) with Financials Ultrasector. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Financials Ultrasector has no effect on the direction of Large Cap i.e., Large Cap and Financials Ultrasector go up and down completely randomly.

Pair Corralation between Large Cap and Financials Ultrasector

Assuming the 90 days horizon Large Cap is expected to generate 1.3 times less return on investment than Financials Ultrasector. But when comparing it to its historical volatility, Large Cap Growth Profund is 1.27 times less risky than Financials Ultrasector. It trades about 0.1 of its potential returns per unit of risk. Financials Ultrasector Profund is currently generating about 0.1 of returns per unit of risk over similar time horizon. If you would invest  2,111  in Financials Ultrasector Profund on September 30, 2024 and sell it today you would earn a total of  1,270  from holding Financials Ultrasector Profund or generate 60.16% return on investment over 90 days.

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

Large Cap Growth Profund  vs.  Financials Ultrasector Profund

Large Cap Growth

Risk-Adjusted Performance

9 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Large Cap Growth Profund are ranked lower than 9 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak forward indicators, Large Cap may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Financials Ultrasector

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Financials Ultrasector Profund are ranked lower than 6 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Financials Ultrasector may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Large Cap and Financials Ultrasector

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

The idea behind Large Cap Growth Profund and Financials Ultrasector Profund 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 Portfolio Analyzer module to portfolio analysis module that provides access to portfolio diagnostics and optimization engine.