Correlation Between Consumer Products and Financial Services

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

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

Diversification Opportunities for Consumer Products and Financial Services

0.34

Correlation Coefficient

Consumer Products  Financial Services

Weak diversification

The 3 months correlation between Consumer and Financial is 0.34. Overlapping area represents the amount of risk that can be diversified away by holding Consumer Products Fund and Financial Services Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Financial Services and Consumer Products 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 Consumer Products Fund are associated (or correlated) with Financial Services. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Financial Services has no effect on the direction of Consumer Products i.e., Consumer Products and Financial Services go up and down completely randomly.

Pair Corralation between Consumer Products and Financial Services

Assuming the 90 days horizon Consumer Products Fund is expected to under-perform the Financial Services. But the mutual fund apears to be less risky and, when comparing its historical volatility, Consumer Products Fund is 1.37 times less risky than Financial Services. The mutual fund trades about -0.27 of its potential returns per unit of risk. The Financial Services Fund is currently generating about -0.02 of returns per unit of risk over similar time horizon. If you would invest  9,623  in Financial Services Fund on October 16, 2024 and sell it today you would lose (157.00) from holding Financial Services Fund or give up 1.63% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	98.36%
Values	Daily Returns

Consumer Products Fund  vs.  Financial Services Fund

Consumer Products

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Consumer Products Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of weak performance in the last few months, the Fund's forward indicators remain fairly strong which may send shares a bit higher in February 2025. The current disturbance may also be a sign of long term up-swing for the fund investors.

Financial Services

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Financial Services Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong forward indicators, Financial Services is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Consumer Products and Financial Services

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

The idea behind Consumer Products Fund and Financial Services 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 Portfolio Diagnostics module to use generated alerts and portfolio events aggregator to diagnose current holdings.