Correlation Between Select Sector and Vanguard Index

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

Diversification Opportunities for Select Sector and Vanguard Index

-0.22

Correlation Coefficient

Select Sector  Vanguard Index

Very good diversification

The 3 months correlation between Select and Vanguard is -0.22. Overlapping area represents the amount of risk that can be diversified away by holding The Select Sector and Vanguard Index Funds in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Vanguard Index Funds 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 Vanguard Index. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Vanguard Index Funds has no effect on the direction of Select Sector i.e., Select Sector and Vanguard Index go up and down completely randomly.

Pair Corralation between Select Sector and Vanguard Index

Assuming the 90 days trading horizon Select Sector is expected to generate 4.1 times less return on investment than Vanguard Index. In addition to that, Select Sector is 1.06 times more volatile than Vanguard Index Funds. It trades about 0.03 of its total potential returns per unit of risk. Vanguard Index Funds is currently generating about 0.11 per unit of volatility. If you would invest  360,587  in Vanguard Index Funds on September 16, 2024 and sell it today you would earn a total of  243,313  from holding Vanguard Index Funds or generate 67.48% return on investment over 90 days.

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

The Select Sector  vs.  Vanguard Index Funds

Select Sector

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days The Select Sector has generated negative risk-adjusted returns adding no value to investors with long positions. 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.

Vanguard Index Funds

Risk-Adjusted Performance

15 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard Index Funds are ranked lower than 15 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak forward indicators, Vanguard Index showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Select Sector and Vanguard Index

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

The idea behind The Select Sector and Vanguard Index Funds 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.

Check out your portfolio center.

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 Analyst Advice module to analyst recommendations and target price estimates broken down by several categories.