Correlation Between ProShares UltraShort and MicroSectors FANG

Can any of the company-specific risk be diversified away by investing in both ProShares UltraShort and MicroSectors FANG 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 ProShares UltraShort and MicroSectors FANG into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between ProShares UltraShort Consumer and MicroSectors FANG Index, you can compare the effects of market volatilities on ProShares UltraShort and MicroSectors FANG 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 ProShares UltraShort with a short position of MicroSectors FANG. Check out your portfolio center. Please also check ongoing floating volatility patterns of ProShares UltraShort and MicroSectors FANG.

Diversification Opportunities for ProShares UltraShort and MicroSectors FANG

0.33

Correlation Coefficient

ProShares UltraShort  MicroSectors FANG

Weak diversification

The 3 months correlation between ProShares and MicroSectors is 0.33. Overlapping area represents the amount of risk that can be diversified away by holding ProShares UltraShort Consumer and MicroSectors FANG Index in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on MicroSectors FANG Index and ProShares UltraShort 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 ProShares UltraShort Consumer are associated (or correlated) with MicroSectors FANG. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of MicroSectors FANG Index has no effect on the direction of ProShares UltraShort i.e., ProShares UltraShort and MicroSectors FANG go up and down completely randomly.

Pair Corralation between ProShares UltraShort and MicroSectors FANG

Considering the 90-day investment horizon ProShares UltraShort is expected to generate 6.27 times less return on investment than MicroSectors FANG. But when comparing it to its historical volatility, ProShares UltraShort Consumer is 4.43 times less risky than MicroSectors FANG. It trades about 0.15 of its potential returns per unit of risk. MicroSectors FANG Index is currently generating about 0.22 of returns per unit of risk over similar time horizon. If you would invest  50,642  in MicroSectors FANG Index on September 22, 2024 and sell it today you would earn a total of  10,858  from holding MicroSectors FANG Index or generate 21.44% return on investment over 90 days.

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

ProShares UltraShort Consumer  vs.  MicroSectors FANG Index

ProShares UltraShort

Risk-Adjusted Performance

10 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in ProShares UltraShort Consumer are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. Despite quite uncertain basic indicators, ProShares UltraShort may actually be approaching a critical reversion point that can send shares even higher in January 2025.

MicroSectors FANG Index

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in MicroSectors FANG Index are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively conflicting technical and fundamental indicators, MicroSectors FANG unveiled solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with ProShares UltraShort and MicroSectors FANG

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

The idea behind ProShares UltraShort Consumer and MicroSectors FANG Index 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 Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.