Correlation Between Industrial Select and Health Care

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

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

Diversification Opportunities for Industrial Select and Health Care

0.65

Correlation Coefficient

Industrial Select  Health Care

Poor diversification

The 3 months correlation between Industrial and Health is 0.65. Overlapping area represents the amount of risk that can be diversified away by holding Industrial Select Sector and Health Care Select in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Health Care Select and Industrial 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 Industrial Select Sector are associated (or correlated) with Health Care. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Health Care Select has no effect on the direction of Industrial Select i.e., Industrial Select and Health Care go up and down completely randomly.

Pair Corralation between Industrial Select and Health Care

Considering the 90-day investment horizon Industrial Select Sector is expected to under-perform the Health Care. In addition to that, Industrial Select is 1.06 times more volatile than Health Care Select. It trades about -0.12 of its total potential returns per unit of risk. Health Care Select is currently generating about 0.03 per unit of volatility. If you would invest  14,675  in Health Care Select on November 28, 2024 and sell it today you would earn a total of  214.00  from holding Health Care Select or generate 1.46% return on investment over 90 days.

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

Industrial Select Sector  vs.  Health Care Select

Industrial Select Sector

Risk-Adjusted Performance

Very Weak

Over the last 90 days Industrial Select Sector has generated negative risk-adjusted returns adding no value to investors with long positions. Despite fairly strong essential indicators, Industrial Select is not utilizing all of its potentials. The current stock price confusion, may contribute to short-horizon losses for the traders.

Health Care Select

Risk-Adjusted Performance

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Health Care Select are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. In spite of fairly stable essential indicators, Health Care is not utilizing all of its potentials. The latest stock price fuss, may contribute to near-short-term losses for the sophisticated investors.

Pair Trading with Industrial Select and Health Care

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

The idea behind Industrial Select Sector and Health Care Select 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 Options Analysis module to analyze and evaluate options and option chains as a potential hedge for your portfolios.