Correlation Between IShares Canadian and Select Sector

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

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

Diversification Opportunities for IShares Canadian and Select Sector

-0.28

Correlation Coefficient

IShares Canadian  Select Sector

Very good diversification

The 3 months correlation between IShares and Select is -0.28. Overlapping area represents the amount of risk that can be diversified away by holding iShares Canadian Short and The Select Sector in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Select Sector and IShares Canadian 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 iShares Canadian Short are associated (or correlated) with Select Sector. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Select Sector has no effect on the direction of IShares Canadian i.e., IShares Canadian and Select Sector go up and down completely randomly.

Pair Corralation between IShares Canadian and Select Sector

Assuming the 90 days trading horizon iShares Canadian Short is not expected to generate positive returns. However, iShares Canadian Short is 28.1 times less risky than Select Sector. It waists most of its returns potential to compensate for thr risk taken. Select Sector is generating about 0.03 per unit of risk. If you would invest  153,910  in The Select Sector on December 30, 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	96.83%
Values	Daily Returns

iShares Canadian Short  vs.  The Select Sector

iShares Canadian Short

Risk-Adjusted Performance

Very Weak

Over the last 90 days iShares Canadian Short has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong fundamental drivers, IShares Canadian is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

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.

Pair Trading with IShares Canadian and Select Sector

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

The idea behind iShares Canadian Short and The 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 Suggestion module to get suggestions outside of your existing asset allocation including your own model portfolios.