Correlation Between Retailing Fund and Energy Fund

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

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

Diversification Opportunities for Retailing Fund and Energy Fund

0.47

Correlation Coefficient

Retailing Fund  Energy Fund

Very weak diversification

The 3 months correlation between Retailing and Energy is 0.47. Overlapping area represents the amount of risk that can be diversified away by holding Retailing Fund Class and Energy Fund Class in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Energy Fund Class and Retailing 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 Retailing Fund Class are associated (or correlated) with Energy Fund. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Energy Fund Class has no effect on the direction of Retailing Fund i.e., Retailing Fund and Energy Fund go up and down completely randomly.

Pair Corralation between Retailing Fund and Energy Fund

Assuming the 90 days horizon Retailing Fund Class is expected to under-perform the Energy Fund. But the mutual fund apears to be less risky and, when comparing its historical volatility, Retailing Fund Class is 1.2 times less risky than Energy Fund. The mutual fund trades about -0.1 of its potential returns per unit of risk. The Energy Fund Class is currently generating about 0.05 of returns per unit of risk over similar time horizon. If you would invest  18,223  in Energy Fund Class on December 23, 2024 and sell it today you would earn a total of  646.00  from holding Energy Fund Class or generate 3.54% return on investment over 90 days.

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

Retailing Fund Class  vs.  Energy Fund Class

Retailing Fund Class

Risk-Adjusted Performance

Very Weak

Over the last 90 days Retailing Fund Class 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.

Energy Fund Class

Risk-Adjusted Performance

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Energy Fund Class are ranked lower than 3 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong fundamental indicators, Energy 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 Retailing Fund and Energy Fund

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

The idea behind Retailing Fund Class and Energy Fund Class 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 Risk-Return Analysis module to view associations between returns expected from investment and the risk you assume.