Correlation Between Health Care and Consumer Products

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

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

Diversification Opportunities for Health Care and Consumer Products

0.75

Correlation Coefficient

Health Care  Consumer Products

Poor diversification

The 3 months correlation between Health and Consumer is 0.75. Overlapping area represents the amount of risk that can be diversified away by holding Health Care 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 Health Care 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 Health Care 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 Health Care i.e., Health Care and Consumer Products go up and down completely randomly.

Pair Corralation between Health Care and Consumer Products

Assuming the 90 days horizon Health Care Fund is expected to generate 0.36 times more return on investment than Consumer Products. However, Health Care Fund is 2.8 times less risky than Consumer Products. It trades about -0.25 of its potential returns per unit of risk. Consumer Products Fund is currently generating about -0.31 per unit of risk. If you would invest  2,993  in Health Care Fund on September 23, 2024 and sell it today you would lose (117.00) from holding Health Care Fund or give up 3.91% of portfolio value over 90 days.

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

Health Care Fund  vs.  Consumer Products Fund

Health Care Fund

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Health Care Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of latest weak performance, the Fund's fundamental indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the fund 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 weak performance in the last few months, the Fund's basic indicators remain fairly strong which may send shares a bit higher in January 2025. The current disturbance may also be a sign of long term up-swing for the fund investors.

Pair Trading with Health Care and Consumer Products

The main advantage of trading using opposite Health Care and Consumer Products positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Health Care 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 Health Care 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 Idea Optimizer module to use advanced portfolio builder with pre-computed micro ideas to build optimal portfolio .