Correlation Between Russell 2000 and Financial Services

Can any of the company-specific risk be diversified away by investing in both Russell 2000 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 Russell 2000 and Financial Services into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Russell 2000 15x and Financial Services Fund, you can compare the effects of market volatilities on Russell 2000 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 Russell 2000 with a short position of Financial Services. Check out your portfolio center. Please also check ongoing floating volatility patterns of Russell 2000 and Financial Services.

Diversification Opportunities for Russell 2000 and Financial Services

0.64

Correlation Coefficient

Russell 2000  Financial Services

Poor diversification

The 3 months correlation between Russell and Financial is 0.64. Overlapping area represents the amount of risk that can be diversified away by holding Russell 2000 15x and Financial Services Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Financial Services and Russell 2000 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 Russell 2000 15x 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 Russell 2000 i.e., Russell 2000 and Financial Services go up and down completely randomly.

Pair Corralation between Russell 2000 and Financial Services

Assuming the 90 days horizon Russell 2000 15x is expected to under-perform the Financial Services. In addition to that, Russell 2000 is 1.68 times more volatile than Financial Services Fund. It trades about -0.13 of its total potential returns per unit of risk. Financial Services Fund is currently generating about 0.0 per unit of volatility. If you would invest  8,324  in Financial Services Fund on December 28, 2024 and sell it today you would lose (46.00) from holding Financial Services Fund or give up 0.55% of portfolio value over 90 days.

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

Russell 2000 15x  vs.  Financial Services Fund

Russell 2000 15x

Risk-Adjusted Performance

Very Weak

Over the last 90 days Russell 2000 15x 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 primary indicators remain fairly strong which may send shares a bit higher in April 2025. The current disturbance may also be a sign of long term up-swing for the fund investors.

Financial Services

Risk-Adjusted Performance

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 basic 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 Russell 2000 and Financial Services

The main advantage of trading using opposite Russell 2000 and Financial Services positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Russell 2000 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 Russell 2000 15x 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 Idea Breakdown module to analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes.