Correlation Between Vulcan Value and Financial Select

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

By analyzing existing cross correlation between Vulcan Value Partners and Financial Select Sector, you can compare the effects of market volatilities on Vulcan Value and Financial Select 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 Vulcan Value with a short position of Financial Select. Check out your portfolio center. Please also check ongoing floating volatility patterns of Vulcan Value and Financial Select.

Diversification Opportunities for Vulcan Value and Financial Select

0.4

Correlation Coefficient

Vulcan Value  Financial Select

Very weak diversification

The 3 months correlation between Vulcan and Financial is 0.4. Overlapping area represents the amount of risk that can be diversified away by holding Vulcan Value Partners and Financial Select Sector in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Financial Select Sector and Vulcan Value 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 Vulcan Value Partners are associated (or correlated) with Financial Select. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Financial Select Sector has no effect on the direction of Vulcan Value i.e., Vulcan Value and Financial Select go up and down completely randomly.

Pair Corralation between Vulcan Value and Financial Select

Assuming the 90 days horizon Vulcan Value Partners is expected to generate 0.71 times more return on investment than Financial Select. However, Vulcan Value Partners is 1.4 times less risky than Financial Select. It trades about -0.13 of its potential returns per unit of risk. Financial Select Sector is currently generating about -0.11 per unit of risk. If you would invest  1,196  in Vulcan Value Partners on December 5, 2024 and sell it today you would lose (27.00) from holding Vulcan Value Partners or give up 2.26% of portfolio value over 90 days.

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

Vulcan Value Partners  vs.  Financial Select Sector

Vulcan Value Partners

Risk-Adjusted Performance

Very Weak

Over the last 90 days Vulcan Value Partners has generated negative risk-adjusted returns adding no value to fund investors. In spite of latest weak performance, the Fund's basic indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the fund investors.

Financial Select Sector

Risk-Adjusted Performance

Very Weak

Over the last 90 days Financial Select Sector has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable essential indicators, Financial Select is not utilizing all of its potentials. The latest stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with Vulcan Value and Financial Select

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

The idea behind Vulcan Value Partners and Financial Select Sector 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 Idea Analyzer module to analyze all characteristics, volatility and risk-adjusted return of Macroaxis ideas.