Correlation Between Financial Select and Vanguard Information

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

Diversification Opportunities for Financial Select and Vanguard Information

0.84

Correlation Coefficient

Financial Select  Vanguard Information

Very poor diversification

The 3 months correlation between Financial and Vanguard is 0.84. Overlapping area represents the amount of risk that can be diversified away by holding Financial Select Sector and Vanguard Information Technolog in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Vanguard Information 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 Vanguard Information. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Vanguard Information has no effect on the direction of Financial Select i.e., Financial Select and Vanguard Information go up and down completely randomly.

Pair Corralation between Financial Select and Vanguard Information

Considering the 90-day investment horizon Financial Select is expected to generate 1.01 times less return on investment than Vanguard Information. But when comparing it to its historical volatility, Financial Select Sector is 1.5 times less risky than Vanguard Information. It trades about 0.15 of its potential returns per unit of risk. Vanguard Information Technology is currently generating about 0.1 of returns per unit of risk over similar time horizon. If you would invest  45,665  in Vanguard Information Technology on September 23, 2024 and sell it today you would earn a total of  17,496  from holding Vanguard Information Technology or generate 38.31% 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.  Vanguard Information Technolog

Financial Select Sector

Risk-Adjusted Performance

7 of 100

OK

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

Vanguard Information

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard Information Technology are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively weak technical and fundamental indicators, Vanguard Information may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Financial Select and Vanguard Information

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

The idea behind Financial Select Sector and Vanguard Information Technology 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 Portfolio Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.