Correlation Between Utilities Fund and Transportation Fund

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

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

Diversification Opportunities for Utilities Fund and Transportation Fund

0.06

Correlation Coefficient

Utilities Fund  Transportation Fund

Significant diversification

The 3 months correlation between Utilities and Transportation is 0.06. Overlapping area represents the amount of risk that can be diversified away by holding Utilities Fund Investor and Transportation Fund Investor in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Transportation Fund and Utilities 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 Utilities Fund Investor are associated (or correlated) with Transportation Fund. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Transportation Fund has no effect on the direction of Utilities Fund i.e., Utilities Fund and Transportation Fund go up and down completely randomly.

Pair Corralation between Utilities Fund and Transportation Fund

Assuming the 90 days horizon Utilities Fund Investor is expected to under-perform the Transportation Fund. But the mutual fund apears to be less risky and, when comparing its historical volatility, Utilities Fund Investor is 1.55 times less risky than Transportation Fund. The mutual fund trades about -0.22 of its potential returns per unit of risk. The Transportation Fund Investor is currently generating about -0.09 of returns per unit of risk over similar time horizon. If you would invest  6,434  in Transportation Fund Investor on October 9, 2024 and sell it today you would lose (158.00) from holding Transportation Fund Investor or give up 2.46% of portfolio value over 90 days.

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

Utilities Fund Investor  vs.  Transportation Fund Investor

Utilities Fund Investor

Risk-Adjusted Performance

0 of 100

Very Weak

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

Transportation Fund

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Transportation Fund Investor are ranked lower than 7 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak forward indicators, Transportation Fund may actually be approaching a critical reversion point that can send shares even higher in February 2025.

Pair Trading with Utilities Fund and Transportation Fund

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

The idea behind Utilities Fund Investor and Transportation 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 Portfolio Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.