Correlation Between Energy Select and IShares Oil

Can any of the company-specific risk be diversified away by investing in both Energy Select and IShares Oil 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 IShares Oil 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 iShares Oil Equipment, you can compare the effects of market volatilities on Energy Select and IShares Oil 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 IShares Oil. Check out your portfolio center. Please also check ongoing floating volatility patterns of Energy Select and IShares Oil.

Diversification Opportunities for Energy Select and IShares Oil

0.88

Correlation Coefficient

Energy Select  IShares Oil

Very poor diversification

The 3 months correlation between Energy and IShares is 0.88. Overlapping area represents the amount of risk that can be diversified away by holding Energy Select Sector and iShares Oil Equipment in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on iShares Oil Equipment 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 IShares Oil. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of iShares Oil Equipment has no effect on the direction of Energy Select i.e., Energy Select and IShares Oil go up and down completely randomly.

Pair Corralation between Energy Select and IShares Oil

Considering the 90-day investment horizon Energy Select is expected to generate 1.21 times less return on investment than IShares Oil. But when comparing it to its historical volatility, Energy Select Sector is 1.59 times less risky than IShares Oil. It trades about 0.1 of its potential returns per unit of risk. iShares Oil Equipment is currently generating about 0.07 of returns per unit of risk over similar time horizon. If you would invest  2,016  in iShares Oil Equipment on September 3, 2024 and sell it today you would earn a total of  162.00  from holding iShares Oil Equipment or generate 8.04% return on investment over 90 days.

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

Energy Select Sector  vs.  iShares Oil Equipment

Energy Select Sector

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Energy Select Sector are ranked lower than 7 (%) 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.

iShares Oil Equipment

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in iShares Oil Equipment are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. In spite of fairly uncertain technical and fundamental indicators, IShares Oil may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Energy Select and IShares Oil

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

The idea behind Energy Select Sector and iShares Oil Equipment 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 Portfolio Anywhere module to track or share privately all of your investments from the convenience of any device.