Correlation Between Select Sector and Steel Dynamics

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

Diversification Opportunities for Select Sector and Steel Dynamics

-0.27

Correlation Coefficient

Select Sector  Steel Dynamics

Very good diversification

The 3 months correlation between Select and Steel is -0.27. Overlapping area represents the amount of risk that can be diversified away by holding The Select Sector and Steel Dynamics in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Steel Dynamics 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 Steel Dynamics. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Steel Dynamics has no effect on the direction of Select Sector i.e., Select Sector and Steel Dynamics go up and down completely randomly.

Pair Corralation between Select Sector and Steel Dynamics

Assuming the 90 days trading horizon The Select Sector is expected to generate 0.94 times more return on investment than Steel Dynamics. However, The Select Sector is 1.07 times less risky than Steel Dynamics. It trades about 0.03 of its potential returns per unit of risk. Steel Dynamics is currently generating about -0.09 per unit of risk. If you would invest  153,910  in The Select Sector on December 29, 2024 and sell it today you would earn a total of  5,446  from holding The Select Sector or generate 3.54% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	98.41%
Values	Daily Returns

The Select Sector  vs.  Steel Dynamics

Select Sector

Risk-Adjusted Performance

Weak

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

Steel Dynamics

Risk-Adjusted Performance

Very Weak

Over the last 90 days Steel Dynamics has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of weak performance in the last few months, the Stock's basic indicators remain fairly strong which may send shares a bit higher in April 2025. The current disturbance may also be a sign of long term up-swing for the company investors.

Pair Trading with Select Sector and Steel Dynamics

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

The idea behind The Select Sector and Steel Dynamics 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 Diagnostics module to use generated alerts and portfolio events aggregator to diagnose current holdings.