Correlation Between Investment Quality and Financial Services

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Can any of the company-specific risk be diversified away by investing in both Investment Quality and Financial Services 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 Investment Quality and Financial Services into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Investment Quality Bond and Financial Services Portfolio, you can compare the effects of market volatilities on Investment Quality and Financial Services 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 Investment Quality with a short position of Financial Services. Check out your portfolio center. Please also check ongoing floating volatility patterns of Investment Quality and Financial Services.

Diversification Opportunities for Investment Quality and Financial Services

-0.83
  Correlation Coefficient

Pay attention - limited upside

The 3 months correlation between Investment and Financial is -0.83. Overlapping area represents the amount of risk that can be diversified away by holding Investment Quality Bond and Financial Services Portfolio in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Financial Services and Investment Quality 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 Investment Quality Bond are associated (or correlated) with Financial Services. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Financial Services has no effect on the direction of Investment Quality i.e., Investment Quality and Financial Services go up and down completely randomly.

Pair Corralation between Investment Quality and Financial Services

Assuming the 90 days horizon Investment Quality Bond is expected to under-perform the Financial Services. But the mutual fund apears to be less risky and, when comparing its historical volatility, Investment Quality Bond is 4.43 times less risky than Financial Services. The mutual fund trades about -0.06 of its potential returns per unit of risk. The Financial Services Portfolio is currently generating about 0.21 of returns per unit of risk over similar time horizon. If you would invest  1,003  in Financial Services Portfolio on August 31, 2024 and sell it today you would earn a total of  159.00  from holding Financial Services Portfolio or generate 15.85% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Against 
StrengthSignificant
Accuracy100.0%
ValuesDaily Returns

Investment Quality Bond  vs.  Financial Services Portfolio

 Performance 
       Timeline  
Investment Quality Bond 

Risk-Adjusted Performance

0 of 100

 
Weak
 
Strong
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.
Financial Services 

Risk-Adjusted Performance

16 of 100

 
Weak
 
Strong
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 basic indicators, Financial Services showed solid returns over the last few months and may actually be approaching a breakup point.

Investment Quality and Financial Services Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Investment Quality and Financial Services

The main advantage of trading using opposite Investment Quality and Financial Services positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Investment Quality position performs unexpectedly, Financial Services 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 Financial Services will offset losses from the drop in Financial Services' long position.
The idea behind Investment Quality Bond and Financial Services 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 Content Syndication module to quickly integrate customizable finance content to your own investment portal.

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