Correlation Between Energy Select and Defiance Next

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

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

Diversification Opportunities for Energy Select and Defiance Next

-0.41

Correlation Coefficient

Energy Select  Defiance Next

Very good diversification

The 3 months correlation between Energy and Defiance is -0.41. Overlapping area represents the amount of risk that can be diversified away by holding Energy Select Sector and Defiance Next Gen in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Defiance Next Gen and Energy 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 Energy Select Sector are associated (or correlated) with Defiance Next. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Defiance Next Gen has no effect on the direction of Energy Select i.e., Energy Select and Defiance Next go up and down completely randomly.

Pair Corralation between Energy Select and Defiance Next

Considering the 90-day investment horizon Energy Select Sector is expected to generate 0.47 times more return on investment than Defiance Next. However, Energy Select Sector is 2.12 times less risky than Defiance Next. It trades about 0.11 of its potential returns per unit of risk. Defiance Next Gen is currently generating about 0.04 per unit of risk. If you would invest  8,828  in Energy Select Sector on September 3, 2024 and sell it today you would earn a total of  725.00  from holding Energy Select Sector or generate 8.21% return on investment over 90 days.

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

Energy Select Sector  vs.  Defiance Next Gen

Energy Select Sector

Risk-Adjusted Performance

8 of 100

OK

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

Defiance Next Gen

Risk-Adjusted Performance

3 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Defiance Next Gen are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. In spite of very unfluctuating basic indicators, Defiance Next may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Energy Select and Defiance Next

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

The idea behind Energy Select Sector and Defiance Next Gen 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 Equity Search module to search for actively traded equities including funds and ETFs from over 30 global markets.