Correlation Between Select Sector and ProShares Trust

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

Diversification Opportunities for Select Sector and ProShares Trust

0.7

Correlation Coefficient

Select Sector  ProShares Trust

Poor diversification

The 3 months correlation between Select and ProShares is 0.7. Overlapping area represents the amount of risk that can be diversified away by holding The Select Sector and ProShares Trust in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on ProShares Trust 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 ProShares Trust. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of ProShares Trust has no effect on the direction of Select Sector i.e., Select Sector and ProShares Trust go up and down completely randomly.

Pair Corralation between Select Sector and ProShares Trust

Assuming the 90 days trading horizon The Select Sector is expected to generate 1.11 times more return on investment than ProShares Trust. However, Select Sector is 1.11 times more volatile than ProShares Trust . It trades about -0.06 of its potential returns per unit of risk. ProShares Trust is currently generating about -0.25 per unit of risk. If you would invest  104,744  in The Select Sector on December 5, 2024 and sell it today you would lose (1,708) from holding The Select Sector or give up 1.63% of portfolio value over 90 days.

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

The Select Sector  vs.  ProShares Trust

Select Sector

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in The Select Sector are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. In spite of fairly strong technical and fundamental indicators, Select Sector is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

ProShares Trust

Risk-Adjusted Performance

Very Weak

Over the last 90 days ProShares Trust has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest weak performance, the Etf's primary indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the ETF investors.

Pair Trading with Select Sector and ProShares Trust

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

The idea behind The Select Sector and ProShares Trust 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 Volatility Analysis module to get historical volatility and risk analysis based on latest market data.