Correlation Between Financial Services and Consumer Products

Can any of the company-specific risk be diversified away by investing in both Financial Services and Consumer Products 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 Consumer Products 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 Consumer Products Fund, you can compare the effects of market volatilities on Financial Services and Consumer Products 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 Consumer Products. Check out your portfolio center. Please also check ongoing floating volatility patterns of Financial Services and Consumer Products.

Diversification Opportunities for Financial Services and Consumer Products

0.05

Correlation Coefficient

Financial Services  Consumer Products

Significant diversification

The 3 months correlation between Financial and Consumer is 0.05. Overlapping area represents the amount of risk that can be diversified away by holding Financial Services Fund and Consumer Products Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Consumer Products 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 Consumer Products. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Consumer Products has no effect on the direction of Financial Services i.e., Financial Services and Consumer Products go up and down completely randomly.

Pair Corralation between Financial Services and Consumer Products

Assuming the 90 days horizon Financial Services Fund is expected to generate 1.05 times more return on investment than Consumer Products. However, Financial Services is 1.05 times more volatile than Consumer Products Fund. It trades about 0.07 of its potential returns per unit of risk. Consumer Products Fund is currently generating about 0.0 per unit of risk. If you would invest  7,088  in Financial Services Fund on September 28, 2024 and sell it today you would earn a total of  2,613  from holding Financial Services Fund or generate 36.87% return on investment over 90 days.

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

Financial Services Fund  vs.  Consumer Products Fund

Financial Services

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Financial Services Fund are ranked lower than 5 (%) of all funds and portfolios of funds over the last 90 days. 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.

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 latest weak performance, the Fund's forward indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the fund investors.

Pair Trading with Financial Services and Consumer Products

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

The idea behind Financial Services Fund and Consumer Products 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 AI Portfolio Architect module to use AI to generate optimal portfolios and find profitable investment opportunities.