Correlation Between Materials Select and Consumer Discretionary

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

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

Diversification Opportunities for Materials Select and Consumer Discretionary

0.28

Correlation Coefficient

Materials Select  Consumer Discretionary

Modest diversification

The 3 months correlation between Materials and Consumer is 0.28. Overlapping area represents the amount of risk that can be diversified away by holding Materials Select Sector and Consumer Discretionary Select in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Consumer Discretionary and Materials Select 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 Materials Select Sector are associated (or correlated) with Consumer Discretionary. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Consumer Discretionary has no effect on the direction of Materials Select i.e., Materials Select and Consumer Discretionary go up and down completely randomly.

Pair Corralation between Materials Select and Consumer Discretionary

Considering the 90-day investment horizon Materials Select Sector is expected to generate 0.7 times more return on investment than Consumer Discretionary. However, Materials Select Sector is 1.43 times less risky than Consumer Discretionary. It trades about 0.04 of its potential returns per unit of risk. Consumer Discretionary Select is currently generating about -0.15 per unit of risk. If you would invest  8,340  in Materials Select Sector on December 30, 2024 and sell it today you would earn a total of  165.00  from holding Materials Select Sector or generate 1.98% return on investment over 90 days.

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

Materials Select Sector  vs.  Consumer Discretionary Select

Materials Select Sector

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Materials Select Sector are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. Despite somewhat strong essential indicators, Materials Select is not utilizing all of its potentials. The recent stock price disturbance, may contribute to short-term losses for the investors.

Consumer Discretionary

Risk-Adjusted Performance

Very Weak

Over the last 90 days Consumer Discretionary Select has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of weak performance in the last few months, the Etf's essential indicators remain fairly strong which may send shares a bit higher in April 2025. The current disturbance may also be a sign of long term up-swing for the ETF investors.

Pair Trading with Materials Select and Consumer Discretionary

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

The idea behind Materials Select Sector and Consumer Discretionary Select 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.

Check out your portfolio center.

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 Pair Correlation module to compare performance and examine fundamental relationship between any two equity instruments.