Correlation Between Financial Select and Invesco KBW

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

Diversification Opportunities for Financial Select and Invesco KBW

0.81

Correlation Coefficient

Financial Select  Invesco KBW

Very poor diversification

The 3 months correlation between Financial and Invesco is 0.81. Overlapping area represents the amount of risk that can be diversified away by holding Financial Select Sector and Invesco KBW Bank in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Invesco KBW Bank 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 Invesco KBW. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Invesco KBW Bank has no effect on the direction of Financial Select i.e., Financial Select and Invesco KBW go up and down completely randomly.

Pair Corralation between Financial Select and Invesco KBW

Considering the 90-day investment horizon Financial Select Sector is expected to generate 0.71 times more return on investment than Invesco KBW. However, Financial Select Sector is 1.41 times less risky than Invesco KBW. It trades about 0.04 of its potential returns per unit of risk. Invesco KBW Bank is currently generating about -0.04 per unit of risk. If you would invest  4,811  in Financial Select Sector on December 30, 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	Strong
Accuracy	100.0%
Values	Daily Returns

Financial Select Sector  vs.  Invesco KBW Bank

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 latest stock price disturbance, may contribute to mid-run losses for the stockholders.

Invesco KBW Bank

Risk-Adjusted Performance

Very Weak

Over the last 90 days Invesco KBW Bank has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong basic indicators, Invesco KBW is not utilizing all of its potentials. The latest stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Financial Select and Invesco KBW

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

The idea behind Financial Select Sector and Invesco KBW Bank 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.

Check out your portfolio center.

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 Correlation Analysis module to reduce portfolio risk simply by holding instruments which are not perfectly correlated.