Correlation Between Financial Services and International Equity

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

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

Diversification Opportunities for Financial Services and International Equity

0.43

Correlation Coefficient

Financial Services  International Equity

Very weak diversification

The 3 months correlation between Financial and International is 0.43. Overlapping area represents the amount of risk that can be diversified away by holding Financial Services Portfolio and International Equity Portfolio in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on International Equity and Financial 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 Financial Services Portfolio are associated (or correlated) with International Equity. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of International Equity has no effect on the direction of Financial Services i.e., Financial Services and International Equity go up and down completely randomly.

Pair Corralation between Financial Services and International Equity

Assuming the 90 days horizon Financial Services Portfolio is expected to under-perform the International Equity. In addition to that, Financial Services is 1.74 times more volatile than International Equity Portfolio. It trades about -0.08 of its total potential returns per unit of risk. International Equity Portfolio is currently generating about 0.15 per unit of volatility. If you would invest  1,146  in International Equity Portfolio on December 2, 2024 and sell it today you would earn a total of  73.00  from holding International Equity Portfolio or generate 6.37% return on investment over 90 days.

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

Financial Services Portfolio  vs.  International Equity Portfolio

Financial Services

Risk-Adjusted Performance

Very Weak

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

International Equity

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in International Equity Portfolio are ranked lower than 11 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, International Equity may actually be approaching a critical reversion point that can send shares even higher in April 2025.

Pair Trading with Financial Services and International Equity

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

The idea behind Financial Services Portfolio and International Equity Portfolio 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 Center module to all portfolio management and optimization tools to improve performance of your portfolios.