Correlation Between Financial Select and IShares Financials

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

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

Diversification Opportunities for Financial Select and IShares Financials

0.98

Correlation Coefficient

Financial Select  IShares Financials

Almost no diversification

The 3 months correlation between Financial and IShares is 0.98. Overlapping area represents the amount of risk that can be diversified away by holding Financial Select Sector and iShares Financials ETF in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on iShares Financials ETF and Financial 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 Financial Select Sector are associated (or correlated) with IShares Financials. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of iShares Financials ETF has no effect on the direction of Financial Select i.e., Financial Select and IShares Financials go up and down completely randomly.

Pair Corralation between Financial Select and IShares Financials

Considering the 90-day investment horizon Financial Select Sector is expected to generate 0.95 times more return on investment than IShares Financials. However, Financial Select Sector is 1.05 times less risky than IShares Financials. It trades about 0.04 of its potential returns per unit of risk. iShares Financials ETF is currently generating about 0.02 per unit of risk. If you would invest  4,811  in Financial Select Sector on December 29, 2024 and sell it today you would earn a total of  110.00  from holding Financial Select Sector or generate 2.29% return on investment over 90 days.

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

Financial Select Sector  vs.  iShares Financials ETF

Financial Select Sector

Risk-Adjusted Performance

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Financial Select Sector are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable essential indicators, Financial Select is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

iShares Financials ETF

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in iShares Financials ETF are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable basic indicators, IShares Financials is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with Financial Select and IShares Financials

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

The idea behind Financial Select Sector and iShares Financials ETF 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 Idea Optimizer module to use advanced portfolio builder with pre-computed micro ideas to build optimal portfolio .