Correlation Between Health Care and Energy Select

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

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

Diversification Opportunities for Health Care and Energy Select

-0.73

Correlation Coefficient

Health Care  Energy Select

Pay attention - limited upside

The 3 months correlation between Health and Energy is -0.73. Overlapping area represents the amount of risk that can be diversified away by holding Health Care 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 Health Care 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 Health Care 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 Health Care i.e., Health Care and Energy Select go up and down completely randomly.

Pair Corralation between Health Care and Energy Select

Considering the 90-day investment horizon Health Care Select is expected to under-perform the Energy Select. But the etf apears to be less risky and, when comparing its historical volatility, Health Care Select is 1.72 times less risky than Energy Select. The etf trades about -0.13 of its potential returns per unit of risk. The Energy Select Sector is currently generating about 0.12 of returns per unit of risk over similar time horizon. If you would invest  8,706  in Energy Select Sector on September 4, 2024 and sell it today you would earn a total of  746.00  from holding Energy Select Sector or generate 8.57% return on investment over 90 days.

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

Health Care Select  vs.  Energy Select Sector

Health Care Select

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Health Care Select has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly stable essential indicators, Health Care is not utilizing all of its potentials. The latest stock price fuss, may contribute to near-short-term losses for the sophisticated investors.

Energy Select Sector

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Energy Select Sector are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. In spite of rather unfluctuating essential indicators, Energy Select may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Health Care and Energy Select

The main advantage of trading using opposite Health Care and Energy Select positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Health Care 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 Health Care 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 Diagnostics module to use generated alerts and portfolio events aggregator to diagnose current holdings.