Correlation Between International Equity and Financial Services

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

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

Diversification Opportunities for International Equity and Financial Services

-0.49

Correlation Coefficient

International Equity  Financial Services

Very good diversification

The 3 months correlation between International and Financial is -0.49. Overlapping area represents the amount of risk that can be diversified away by holding International Equity Portfolio and Financial Services Portfolio in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Financial Services and International Equity 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 International Equity Portfolio 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 International Equity i.e., International Equity and Financial Services go up and down completely randomly.

Pair Corralation between International Equity and Financial Services

Assuming the 90 days horizon International Equity Portfolio is expected to under-perform the Financial Services. But the mutual fund apears to be less risky and, when comparing its historical volatility, International Equity Portfolio is 1.45 times less risky than Financial Services. The mutual fund trades about -0.02 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 Period	3 Months [change]
Direction	Moves Against
Strength	Very Weak
Accuracy	98.44%
Values	Daily Returns

International Equity Portfolio  vs.  Financial Services Portfolio

International Equity

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days International Equity Portfolio has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, International Equity 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

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.

Pair Trading with International Equity and Financial Services

The main advantage of trading using opposite International Equity and Financial Services positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if International Equity 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 International Equity Portfolio 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.

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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 Diagnostics module to use generated alerts and portfolio events aggregator to diagnose current holdings.