Correlation Between Retailing Fund and Technology Fund

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

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

Diversification Opportunities for Retailing Fund and Technology Fund

0.85

Correlation Coefficient

Retailing Fund  Technology Fund

Very poor diversification

The 3 months correlation between Retailing and Technology is 0.85. Overlapping area represents the amount of risk that can be diversified away by holding Retailing Fund Investor and Technology Fund Investor in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Technology Fund Investor 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 Investor are associated (or correlated) with Technology Fund. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Technology Fund Investor has no effect on the direction of Retailing Fund i.e., Retailing Fund and Technology Fund go up and down completely randomly.

Pair Corralation between Retailing Fund and Technology Fund

Assuming the 90 days horizon Retailing Fund is expected to generate 1.27 times less return on investment than Technology Fund. But when comparing it to its historical volatility, Retailing Fund Investor is 1.39 times less risky than Technology Fund. It trades about 0.2 of its potential returns per unit of risk. Technology Fund Investor is currently generating about 0.19 of returns per unit of risk over similar time horizon. If you would invest  19,064  in Technology Fund Investor on September 3, 2024 and sell it today you would earn a total of  2,698  from holding Technology Fund Investor or generate 14.15% return on investment over 90 days.

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

Retailing Fund Investor  vs.  Technology Fund Investor

Retailing Fund Investor

Risk-Adjusted Performance

16 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Retailing Fund Investor are ranked lower than 16 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak forward indicators, Retailing Fund may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Technology Fund Investor

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Technology Fund Investor are ranked lower than 14 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak forward indicators, Technology Fund showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Retailing Fund and Technology Fund

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

The idea behind Retailing Fund Investor and Technology 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 Price Ceiling Movement module to calculate and plot Price Ceiling Movement for different equity instruments.