Correlation Between Energy Services and Health Care

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

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

Diversification Opportunities for Energy Services and Health Care

-0.09

Correlation Coefficient

Energy Services  Health Care

Good diversification

The 3 months correlation between Energy and Health is -0.09. Overlapping area represents the amount of risk that can be diversified away by holding Energy Services Fund and Health Care Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Health Care Fund and Energy Services 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 Energy Services Fund are associated (or correlated) with Health Care. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Health Care Fund has no effect on the direction of Energy Services i.e., Energy Services and Health Care go up and down completely randomly.

Pair Corralation between Energy Services and Health Care

Assuming the 90 days horizon Energy Services Fund is expected to under-perform the Health Care. In addition to that, Energy Services is 2.33 times more volatile than Health Care Fund. It trades about -0.13 of its total potential returns per unit of risk. Health Care Fund is currently generating about 0.03 per unit of volatility. If you would invest  4,179  in Health Care Fund on September 18, 2024 and sell it today you would earn a total of  13.00  from holding Health Care Fund or generate 0.31% return on investment over 90 days.

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

Energy Services Fund  vs.  Health Care Fund

Energy Services

Risk-Adjusted Performance

0 of 100

Very Weak

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

Health Care Fund

Risk-Adjusted Performance

0 of 100

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.

Pair Trading with Energy Services and Health Care

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

The idea behind Energy Services Fund and Health Care Fund 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 Holdings module to check your current holdings and cash postion to detemine if your portfolio needs rebalancing.