Correlation Between Financial Services and Ishares Tips

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

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

Diversification Opportunities for Financial Services and Ishares Tips

-0.53

Correlation Coefficient

Financial Services  Ishares Tips

Excellent diversification

The 3 months correlation between Financial and Ishares is -0.53. Overlapping area represents the amount of risk that can be diversified away by holding Financial Services Fund and Ishares Tips Bond in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Ishares Tips Bond and Financial Services 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 Financial Services Fund are associated (or correlated) with Ishares Tips. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Ishares Tips Bond has no effect on the direction of Financial Services i.e., Financial Services and Ishares Tips go up and down completely randomly.

Pair Corralation between Financial Services and Ishares Tips

Assuming the 90 days horizon Financial Services Fund is expected to under-perform the Ishares Tips. In addition to that, Financial Services is 3.54 times more volatile than Ishares Tips Bond. It trades about -0.33 of its total potential returns per unit of risk. Ishares Tips Bond is currently generating about -0.17 per unit of volatility. If you would invest  1,133  in Ishares Tips Bond on September 22, 2024 and sell it today you would lose (12.00) from holding Ishares Tips Bond or give up 1.06% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Very Weak
Accuracy	95.45%
Values	Daily Returns

Financial Services Fund  vs.  Ishares Tips Bond

Financial Services

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Financial Services Fund are ranked lower than 2 (%) of all funds and portfolios of funds over the last 90 days. 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.

Ishares Tips Bond

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with Financial Services and Ishares Tips

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

The idea behind Financial Services Fund and Ishares Tips Bond 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 Comparator module to compare the composition, asset allocations and performance of any two portfolios in your account.