Correlation Between Energy Select and Financial Select

Can any of the company-specific risk be diversified away by investing in both Energy Select 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 Energy Select and Financial Select 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 Financial Select Sector, you can compare the effects of market volatilities on Energy Select 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 Energy Select with a short position of Financial Select. Check out your portfolio center. Please also check ongoing floating volatility patterns of Energy Select and Financial Select.

Diversification Opportunities for Energy Select and Financial Select

0.66

Correlation Coefficient

Energy Select  Financial Select

Poor diversification

The 3 months correlation between Energy and Financial is 0.66. Overlapping area represents the amount of risk that can be diversified away by holding Energy Select Sector 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 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 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 Energy Select i.e., Energy Select and Financial Select go up and down completely randomly.

Pair Corralation between Energy Select and Financial Select

Considering the 90-day investment horizon Energy Select Sector is expected to under-perform the Financial Select. In addition to that, Energy Select is 1.61 times more volatile than Financial Select Sector. It trades about -0.47 of its total potential returns per unit of risk. Financial Select Sector is currently generating about -0.14 per unit of volatility. If you would invest  5,002  in Financial Select Sector on September 18, 2024 and sell it today you would lose (92.00) from holding Financial Select Sector or give up 1.84% of portfolio value over 90 days.

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

Energy Select Sector  vs.  Financial Select Sector

Energy Select Sector

Risk-Adjusted Performance

0 of 100

Weak

Over the last 90 days Energy Select Sector has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound essential indicators, Energy Select is not utilizing all of its potentials. The current stock price tumult, may contribute to shorter-term losses for the shareholders.

Financial Select Sector

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Financial Select Sector are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. Despite nearly unsteady essential indicators, Financial Select may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Energy Select and Financial Select

The main advantage of trading using opposite Energy Select and Financial Select positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Energy Select 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 Energy Select Sector 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 Bond Analysis module to evaluate and analyze corporate bonds as a potential investment for your portfolios..