Correlation Between Invesco SP and Energy Select

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

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

Diversification Opportunities for Invesco SP and Energy Select

0.81

Correlation Coefficient

Invesco SP  Energy Select

Very poor diversification

The 3 months correlation between Invesco and Energy is 0.81. Overlapping area represents the amount of risk that can be diversified away by holding Invesco SP SmallCap 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 Invesco SP 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 Invesco SP SmallCap 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 Invesco SP i.e., Invesco SP and Energy Select go up and down completely randomly.

Pair Corralation between Invesco SP and Energy Select

Given the investment horizon of 90 days Invesco SP SmallCap is expected to generate 1.64 times more return on investment than Energy Select. However, Invesco SP is 1.64 times more volatile than Energy Select Sector. It trades about 0.04 of its potential returns per unit of risk. Energy Select Sector is currently generating about 0.06 per unit of risk. If you would invest  4,812  in Invesco SP SmallCap on September 15, 2024 and sell it today you would earn a total of  211.00  from holding Invesco SP SmallCap or generate 4.38% return on investment over 90 days.

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

Invesco SP SmallCap  vs.  Energy Select Sector

Invesco SP SmallCap

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Invesco SP SmallCap are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound fundamental indicators, Invesco SP is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

Energy Select Sector

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Energy Select Sector are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound essential indicators, Energy Select is not utilizing all of its potentials. The current stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with Invesco SP and Energy Select

The main advantage of trading using opposite Invesco SP and Energy Select positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Invesco SP 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 Invesco SP SmallCap 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 Alpha Finder module to use alpha and beta coefficients to find investment opportunities after accounting for the risk.