Correlation Between Select Sector and SPDR SP

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

Diversification Opportunities for Select Sector and SPDR SP

0.96

Correlation Coefficient

Select Sector  SPDR SP

Almost no diversification

The 3 months correlation between Select and SPDR is 0.96. Overlapping area represents the amount of risk that can be diversified away by holding The Select Sector and SPDR SP 500 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on SPDR SP 500 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 SPDR SP. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of SPDR SP 500 has no effect on the direction of Select Sector i.e., Select Sector and SPDR SP go up and down completely randomly.

Pair Corralation between Select Sector and SPDR SP

Assuming the 90 days trading horizon Select Sector is expected to generate 1.43 times less return on investment than SPDR SP. In addition to that, Select Sector is 1.56 times more volatile than SPDR SP 500. It trades about 0.07 of its total potential returns per unit of risk. SPDR SP 500 is currently generating about 0.16 per unit of volatility. If you would invest  1,004,574  in SPDR SP 500 on September 17, 2024 and sell it today you would earn a total of  212,240  from holding SPDR SP 500 or generate 21.13% return on investment over 90 days.

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

The Select Sector  vs.  SPDR SP 500

Select Sector

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in The Select Sector are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak forward-looking signals, Select Sector showed solid returns over the last few months and may actually be approaching a breakup point.

SPDR SP 500

Risk-Adjusted Performance

16 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in SPDR SP 500 are ranked lower than 16 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak basic indicators, SPDR SP showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Select Sector and SPDR SP

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

The idea behind The Select Sector and SPDR 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 Stock Screener module to find equities using a custom stock filter or screen asymmetry in trading patterns, price, volume, or investment outlook..