Correlation Between Nasdaq 100 and Financial Industries

Can any of the company-specific risk be diversified away by investing in both Nasdaq 100 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 Nasdaq 100 and Financial Industries into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Nasdaq 100 Index Fund and Financial Industries Fund, you can compare the effects of market volatilities on Nasdaq 100 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 Nasdaq 100 with a short position of Financial Industries. Check out your portfolio center. Please also check ongoing floating volatility patterns of Nasdaq 100 and Financial Industries.

Diversification Opportunities for Nasdaq 100 and Financial Industries

0.41

Correlation Coefficient

Nasdaq 100  Financial Industries

Very weak diversification

The 3 months correlation between Nasdaq and Financial is 0.41. Overlapping area represents the amount of risk that can be diversified away by holding Nasdaq 100 Index 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 Nasdaq 100 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 Nasdaq 100 Index 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 Nasdaq 100 i.e., Nasdaq 100 and Financial Industries go up and down completely randomly.

Pair Corralation between Nasdaq 100 and Financial Industries

Assuming the 90 days horizon Nasdaq 100 Index Fund is expected to generate 0.65 times more return on investment than Financial Industries. However, Nasdaq 100 Index Fund is 1.53 times less risky than Financial Industries. It trades about 0.03 of its potential returns per unit of risk. Financial Industries Fund is currently generating about -0.31 per unit of risk. If you would invest  3,796  in Nasdaq 100 Index Fund on October 9, 2024 and sell it today you would earn a total of  20.00  from holding Nasdaq 100 Index Fund or generate 0.53% return on investment over 90 days.

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

Nasdaq 100 Index Fund  vs.  Financial Industries Fund

Nasdaq 100 Index

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Nasdaq 100 Index Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong forward-looking signals, Nasdaq 100 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

0 of 100

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 Nasdaq 100 and Financial Industries

The main advantage of trading using opposite Nasdaq 100 and Financial Industries positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Nasdaq 100 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 Nasdaq 100 Index 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 Options Analysis module to analyze and evaluate options and option chains as a potential hedge for your portfolios.