Correlation Between Financial Select and Vanguard

Can any of the company-specific risk be diversified away by investing in both Financial Select and Vanguard 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 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 SP 500, you can compare the effects of market volatilities on Financial Select and Vanguard 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. Check out your portfolio center. Please also check ongoing floating volatility patterns of Financial Select and Vanguard.

Diversification Opportunities for Financial Select and Vanguard

0.94

Correlation Coefficient

Financial Select  Vanguard

Almost no diversification

The 3 months correlation between Financial and Vanguard is 0.94. Overlapping area represents the amount of risk that can be diversified away by holding Financial Select Sector and Vanguard SP 500 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Vanguard SP 500 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. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Vanguard SP 500 has no effect on the direction of Financial Select i.e., Financial Select and Vanguard go up and down completely randomly.

Pair Corralation between Financial Select and Vanguard

Considering the 90-day investment horizon Financial Select Sector is expected to under-perform the Vanguard. In addition to that, Financial Select is 1.7 times more volatile than Vanguard SP 500. It trades about -0.05 of its total potential returns per unit of risk. Vanguard SP 500 is currently generating about 0.4 per unit of volatility. If you would invest  53,850  in Vanguard SP 500 on September 16, 2024 and sell it today you would earn a total of  1,711  from holding Vanguard SP 500 or generate 3.18% 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.  Vanguard SP 500

Financial Select Sector

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Financial Select Sector are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. Despite nearly inconsistent essential indicators, Financial Select may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Vanguard SP 500

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard SP 500 are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. In spite of very inconsistent basic indicators, Vanguard may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Financial Select and Vanguard

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

The idea behind Financial Select Sector and Vanguard SP 500 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 Equity Search module to search for actively traded equities including funds and ETFs from over 30 global markets.