Correlation Between Health Care and Biotechnology Fund

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

Diversification Opportunities for Health Care and Biotechnology Fund

0.68
  Correlation Coefficient

Poor diversification

The 3 months correlation between Health and Biotechnology is 0.68. Overlapping area represents the amount of risk that can be diversified away by holding Health Care Fund and Biotechnology Fund Investor in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Biotechnology Fund 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 Biotechnology Fund. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Biotechnology Fund has no effect on the direction of Health Care i.e., Health Care and Biotechnology Fund go up and down completely randomly.

Pair Corralation between Health Care and Biotechnology Fund

Assuming the 90 days horizon Health Care Fund is expected to under-perform the Biotechnology Fund. But the mutual fund apears to be less risky and, when comparing its historical volatility, Health Care Fund is 3.98 times less risky than Biotechnology Fund. The mutual fund trades about -0.17 of its potential returns per unit of risk. The Biotechnology Fund Investor is currently generating about -0.01 of returns per unit of risk over similar time horizon. If you would invest  8,126  in Biotechnology Fund Investor on September 18, 2024 and sell it today you would lose (321.00) from holding Biotechnology Fund Investor or give up 3.95% of portfolio value over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthSignificant
Accuracy100.0%
ValuesDaily Returns

Health Care Fund  vs.  Biotechnology Fund Investor

 Performance 
       Timeline  
Health Care Fund 

Risk-Adjusted Performance

0 of 100

 
Weak
 
Strong
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.
Biotechnology Fund 

Risk-Adjusted Performance

0 of 100

 
Weak
 
Strong
Very Weak
Over the last 90 days Biotechnology Fund Investor has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong forward indicators, Biotechnology Fund is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Health Care and Biotechnology Fund Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Health Care and Biotechnology Fund

The main advantage of trading using opposite Health Care and Biotechnology Fund positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Health Care position performs unexpectedly, Biotechnology Fund 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 Biotechnology Fund will offset losses from the drop in Biotechnology Fund's long position.
The idea behind Health Care Fund and Biotechnology Fund Investor 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.
Check out your portfolio center.
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 Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.

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