Correlation Between Financial Services and Investment Quality

Can any of the company-specific risk be diversified away by investing in both Financial Services and Investment Quality 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 Investment Quality 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 Investment Quality Bond, you can compare the effects of market volatilities on Financial Services and Investment Quality 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 Investment Quality. Check out your portfolio center. Please also check ongoing floating volatility patterns of Financial Services and Investment Quality.

Diversification Opportunities for Financial Services and Investment Quality

-0.84

Correlation Coefficient

Financial Services  Investment Quality

Pay attention - limited upside

The 3 months correlation between Financial and Investment is -0.84. Overlapping area represents the amount of risk that can be diversified away by holding Financial Services Portfolio and Investment Quality Bond in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Investment Quality Bond 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 Investment Quality. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Investment Quality Bond has no effect on the direction of Financial Services i.e., Financial Services and Investment Quality go up and down completely randomly.

Pair Corralation between Financial Services and Investment Quality

Assuming the 90 days horizon Financial Services Portfolio is expected to generate 4.64 times more return on investment than Investment Quality. However, Financial Services is 4.64 times more volatile than Investment Quality Bond. It trades about 0.21 of its potential returns per unit of risk. Investment Quality Bond is currently generating about -0.06 per unit of risk. If you would invest  898.00  in Financial Services Portfolio on August 31, 2024 and sell it today you would earn a total of  149.00  from holding Financial Services Portfolio or generate 16.59% return on investment over 90 days.

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

Financial Services Portfolio  vs.  Investment Quality Bond

Financial Services

Risk-Adjusted Performance

16 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Financial Services Portfolio are ranked lower than 16 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak fundamental indicators, Financial Services showed solid returns over the last few months and may actually be approaching a breakup point.

Investment Quality Bond

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with Financial Services and Investment Quality

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

The idea behind Financial Services Portfolio and Investment Quality Bond 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 Correlation Analysis module to reduce portfolio risk simply by holding instruments which are not perfectly correlated.