Correlation Between Consumer Discretionary and IShares Morningstar

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

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

Diversification Opportunities for Consumer Discretionary and IShares Morningstar

0.8

Correlation Coefficient

Consumer Discretionary  IShares Morningstar

Very poor diversification

The 3 months correlation between Consumer and IShares is 0.8. Overlapping area represents the amount of risk that can be diversified away by holding Consumer Discretionary Select and iShares Morningstar Growth in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on iShares Morningstar and Consumer Discretionary 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 Discretionary Select are associated (or correlated) with IShares Morningstar. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of iShares Morningstar has no effect on the direction of Consumer Discretionary i.e., Consumer Discretionary and IShares Morningstar go up and down completely randomly.

Pair Corralation between Consumer Discretionary and IShares Morningstar

Considering the 90-day investment horizon Consumer Discretionary Select is expected to under-perform the IShares Morningstar. In addition to that, Consumer Discretionary is 1.15 times more volatile than iShares Morningstar Growth. It trades about -0.19 of its total potential returns per unit of risk. iShares Morningstar Growth is currently generating about -0.09 per unit of volatility. If you would invest  9,276  in iShares Morningstar Growth on October 13, 2024 and sell it today you would lose (217.00) from holding iShares Morningstar Growth or give up 2.34% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	95.0%
Values	Daily Returns

Consumer Discretionary Select  vs.  iShares Morningstar Growth

Consumer Discretionary

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Consumer Discretionary Select are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak essential indicators, Consumer Discretionary may actually be approaching a critical reversion point that can send shares even higher in February 2025.

iShares Morningstar

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in iShares Morningstar Growth are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound forward-looking signals, IShares Morningstar 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 Discretionary and IShares Morningstar

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

The idea behind Consumer Discretionary Select and iShares Morningstar Growth 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 Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.