Correlation Between Select Sector and IShares NAFTRAC

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

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

Diversification Opportunities for Select Sector and IShares NAFTRAC

-0.4

Correlation Coefficient

Select Sector  IShares NAFTRAC

Very good diversification

The 3 months correlation between Select and IShares is -0.4. Overlapping area represents the amount of risk that can be diversified away by holding The Select Sector and iShares NAFTRAC in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on iShares NAFTRAC and Select Sector 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 The Select Sector are associated (or correlated) with IShares NAFTRAC. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of iShares NAFTRAC has no effect on the direction of Select Sector i.e., Select Sector and IShares NAFTRAC go up and down completely randomly.

Pair Corralation between Select Sector and IShares NAFTRAC

Assuming the 90 days trading horizon The Select Sector is expected to generate 1.89 times more return on investment than IShares NAFTRAC. However, Select Sector is 1.89 times more volatile than iShares NAFTRAC. It trades about 0.09 of its potential returns per unit of risk. iShares NAFTRAC is currently generating about -0.02 per unit of risk. If you would invest  460,004  in The Select Sector on October 25, 2024 and sell it today you would earn a total of  35,226  from holding The Select Sector or generate 7.66% return on investment over 90 days.

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

The Select Sector  vs.  iShares NAFTRAC

Select Sector

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in The Select Sector are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak forward-looking signals, Select Sector may actually be approaching a critical reversion point that can send shares even higher in February 2025.

iShares NAFTRAC

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days iShares NAFTRAC has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound basic indicators, IShares NAFTRAC is not utilizing all of its potentials. The current stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with Select Sector and IShares NAFTRAC

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

The idea behind The Select Sector and iShares NAFTRAC 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 .