Correlation Between Health Care and Financial Services

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

Diversification Opportunities for Health Care and Financial Services

-0.34

Correlation Coefficient

Health Care  Financial Services

Very good diversification

The 3 months correlation between Health and Financial is -0.34. Overlapping area represents the amount of risk that can be diversified away by holding Health Care 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 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 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 Health Care i.e., Health Care and Financial Services go up and down completely randomly.

Pair Corralation between Health Care and Financial Services

Assuming the 90 days horizon Health Care Fund is expected to generate 0.75 times more return on investment than Financial Services. However, Health Care Fund is 1.34 times less risky than Financial Services. It trades about -0.2 of its potential returns per unit of risk. Financial Services Fund is currently generating about -0.34 per unit of risk. If you would invest  4,264  in Health Care Fund on September 22, 2024 and sell it today you would lose (143.00) from holding Health Care Fund or give up 3.35% of portfolio value over 90 days.

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

Health Care Fund  vs.  Financial Services 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 forward indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the fund investors.

Financial Services

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Financial Services Fund are ranked lower than 1 (%) 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.

Pair Trading with Health Care and Financial Services

The main advantage of trading using opposite Health Care and Financial Services positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Health Care 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 Health Care 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 AI Portfolio Architect module to use AI to generate optimal portfolios and find profitable investment opportunities.