Correlation Between Fundamental Large and Financial Services

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

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

Diversification Opportunities for Fundamental Large and Financial Services

0.42

Correlation Coefficient

Fundamental Large  Financial Services

Very weak diversification

The 3 months correlation between Fundamental and Financial is 0.42. Overlapping area represents the amount of risk that can be diversified away by holding Fundamental Large Cap and Financial Services Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Financial Services and Fundamental Large 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 Fundamental Large Cap 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 Fundamental Large i.e., Fundamental Large and Financial Services go up and down completely randomly.

Pair Corralation between Fundamental Large and Financial Services

Assuming the 90 days horizon Fundamental Large Cap is expected to under-perform the Financial Services. But the mutual fund apears to be less risky and, when comparing its historical volatility, Fundamental Large Cap is 1.04 times less risky than Financial Services. The mutual fund trades about -0.08 of its potential returns per unit of risk. The Financial Services Fund is currently generating about 0.01 of returns per unit of risk over similar time horizon. If you would invest  7,042  in Financial Services Fund on December 25, 2024 and sell it today you would earn a total of  14.00  from holding Financial Services Fund or generate 0.2% return on investment over 90 days.

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

Fundamental Large Cap  vs.  Financial Services Fund

Fundamental Large Cap

Risk-Adjusted Performance

Very Weak

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

Very Weak

Over the last 90 days Financial Services Fund 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.

Pair Trading with Fundamental Large and Financial Services

The main advantage of trading using opposite Fundamental Large and Financial Services positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Fundamental Large 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 Fundamental Large Cap and Financial Services Fund 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 Share Portfolio module to track or share privately all of your investments from the convenience of any device.