Correlation Between Select Sector and Vanguard Index

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

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

Diversification Opportunities for Select Sector and Vanguard Index

0.87

Correlation Coefficient

Select Sector  Vanguard Index

Very poor diversification

The 3 months correlation between Select and Vanguard is 0.87. Overlapping area represents the amount of risk that can be diversified away by holding The Select Sector and Vanguard Index Funds in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Vanguard Index Funds and Select Sector 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 The Select Sector are associated (or correlated) with Vanguard Index. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Vanguard Index Funds has no effect on the direction of Select Sector i.e., Select Sector and Vanguard Index go up and down completely randomly.

Pair Corralation between Select Sector and Vanguard Index

Assuming the 90 days trading horizon Select Sector is expected to generate 3.48 times less return on investment than Vanguard Index. In addition to that, Select Sector is 1.55 times more volatile than Vanguard Index Funds. It trades about 0.02 of its total potential returns per unit of risk. Vanguard Index Funds is currently generating about 0.12 per unit of volatility. If you would invest  663,658  in Vanguard Index Funds on September 17, 2024 and sell it today you would earn a total of  454,015  from holding Vanguard Index Funds or generate 68.41% return on investment over 90 days.

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

The Select Sector  vs.  Vanguard Index Funds

Select Sector

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in The Select Sector are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak technical and fundamental indicators, Select Sector may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Vanguard Index Funds

Risk-Adjusted Performance

15 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard Index Funds are ranked lower than 15 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak basic indicators, Vanguard Index showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Select Sector and Vanguard Index

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

The idea behind The Select Sector and Vanguard Index Funds 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 Options Analysis module to analyze and evaluate options and option chains as a potential hedge for your portfolios.