Correlation Between Banking Fund and Retailing Fund

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

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

Diversification Opportunities for Banking Fund and Retailing Fund

0.93

Correlation Coefficient

Banking Fund  Retailing Fund

Almost no diversification

The 3 months correlation between Banking and Retailing is 0.93. Overlapping area represents the amount of risk that can be diversified away by holding Banking Fund Investor and Retailing Fund Investor in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Retailing Fund Investor and Banking Fund 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 Banking Fund Investor are associated (or correlated) with Retailing Fund. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Retailing Fund Investor has no effect on the direction of Banking Fund i.e., Banking Fund and Retailing Fund go up and down completely randomly.

Pair Corralation between Banking Fund and Retailing Fund

Assuming the 90 days horizon Banking Fund Investor is expected to generate 1.15 times more return on investment than Retailing Fund. However, Banking Fund is 1.15 times more volatile than Retailing Fund Investor. It trades about -0.04 of its potential returns per unit of risk. Retailing Fund Investor is currently generating about -0.07 per unit of risk. If you would invest  10,138  in Banking Fund Investor on December 30, 2024 and sell it today you would lose (392.00) from holding Banking Fund Investor or give up 3.87% of portfolio value over 90 days.

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

Banking Fund Investor  vs.  Retailing Fund Investor

Banking Fund Investor

Risk-Adjusted Performance

Very Weak

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

Retailing Fund Investor

Risk-Adjusted Performance

Very Weak

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

Pair Trading with Banking Fund and Retailing Fund

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

The idea behind Banking Fund Investor and Retailing 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.

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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 Transaction History module to view history of all your transactions and understand their impact on performance.