Correlation Between Consumer Staples and Energy Select

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

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

Diversification Opportunities for Consumer Staples and Energy Select

0.19

Correlation Coefficient

Consumer Staples  Energy Select

Average diversification

The 3 months correlation between Consumer and Energy is 0.19. Overlapping area represents the amount of risk that can be diversified away by holding Consumer Staples Select and Energy Select Sector in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Energy Select Sector and Consumer Staples 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 Consumer Staples Select are associated (or correlated) with Energy Select. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Energy Select Sector has no effect on the direction of Consumer Staples i.e., Consumer Staples and Energy Select go up and down completely randomly.

Pair Corralation between Consumer Staples and Energy Select

Considering the 90-day investment horizon Consumer Staples is expected to generate 1.14 times less return on investment than Energy Select. But when comparing it to its historical volatility, Consumer Staples Select is 1.84 times less risky than Energy Select. It trades about 0.06 of its potential returns per unit of risk. Energy Select Sector is currently generating about 0.03 of returns per unit of risk over similar time horizon. If you would invest  7,299  in Energy Select Sector on December 5, 2024 and sell it today you would earn a total of  1,398  from holding Energy Select Sector or generate 19.15% return on investment over 90 days.

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

Consumer Staples Select  vs.  Energy Select Sector

Consumer Staples Select

Risk-Adjusted Performance

Very Weak

Over the last 90 days Consumer Staples Select has generated negative risk-adjusted returns adding no value to investors with long positions. Even with relatively invariable essential indicators, Consumer Staples is not utilizing all of its potentials. The current stock price agitation, may contribute to short-term losses for the retail investors.

Energy Select Sector

Risk-Adjusted Performance

Very Weak

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

Pair Trading with Consumer Staples and Energy Select

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

The idea behind Consumer Staples Select and Energy Select Sector 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 Portfolio Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.