Correlation Between Main Thematic and Main Sector

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

By analyzing existing cross correlation between Main Thematic Innovation and Main Sector Rotation, you can compare the effects of market volatilities on Main Thematic and Main Sector 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 Main Thematic with a short position of Main Sector. Check out your portfolio center. Please also check ongoing floating volatility patterns of Main Thematic and Main Sector.

Diversification Opportunities for Main Thematic and Main Sector

0.85

Correlation Coefficient

Main Thematic  Main Sector

Very poor diversification

The 3 months correlation between Main and Main is 0.85. Overlapping area represents the amount of risk that can be diversified away by holding Main Thematic Innovation and Main Sector Rotation in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Main Sector Rotation and Main Thematic 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 Main Thematic Innovation are associated (or correlated) with Main Sector. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Main Sector Rotation has no effect on the direction of Main Thematic i.e., Main Thematic and Main Sector go up and down completely randomly.

Pair Corralation between Main Thematic and Main Sector

Given the investment horizon of 90 days Main Thematic Innovation is expected to under-perform the Main Sector. In addition to that, Main Thematic is 1.99 times more volatile than Main Sector Rotation. It trades about -0.04 of its total potential returns per unit of risk. Main Sector Rotation is currently generating about -0.05 per unit of volatility. If you would invest  5,690  in Main Sector Rotation on December 2, 2024 and sell it today you would lose (199.00) from holding Main Sector Rotation or give up 3.5% of portfolio value over 90 days.

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

Main Thematic Innovation  vs.  Main Sector Rotation

Main Thematic Innovation

Risk-Adjusted Performance

Very Weak

Over the last 90 days Main Thematic Innovation has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of comparatively stable basic indicators, Main Thematic is not utilizing all of its potentials. The newest stock price uproar, may contribute to short-horizon losses for the private investors.

Main Sector Rotation

Risk-Adjusted Performance

Very Weak

Over the last 90 days Main Sector Rotation has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of comparatively stable fundamental indicators, Main Sector is not utilizing all of its potentials. The newest stock price uproar, may contribute to short-horizon losses for the private investors.

Pair Trading with Main Thematic and Main Sector

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

The idea behind Main Thematic Innovation and Main Sector Rotation 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 Global Markets Map module to get a quick overview of global market snapshot using zoomable world map. Drill down to check world indexes.