Correlation Between IShares ESG and IShares SPTSX

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

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

Diversification Opportunities for IShares ESG and IShares SPTSX

-0.11

Correlation Coefficient

IShares ESG  IShares SPTSX

Good diversification

The 3 months correlation between IShares and IShares is -0.11. Overlapping area represents the amount of risk that can be diversified away by holding iShares ESG Aware and iShares SPTSX Small in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on iShares SPTSX Small and IShares ESG 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 ESG Aware are associated (or correlated) with IShares SPTSX. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of iShares SPTSX Small has no effect on the direction of IShares ESG i.e., IShares ESG and IShares SPTSX go up and down completely randomly.

Pair Corralation between IShares ESG and IShares SPTSX

Assuming the 90 days trading horizon iShares ESG Aware is expected to generate 0.72 times more return on investment than IShares SPTSX. However, iShares ESG Aware is 1.39 times less risky than IShares SPTSX. It trades about 0.02 of its potential returns per unit of risk. iShares SPTSX Small is currently generating about -0.16 per unit of risk. If you would invest  2,171  in iShares ESG Aware on December 4, 2024 and sell it today you would earn a total of  6.00  from holding iShares ESG Aware or generate 0.28% return on investment over 90 days.

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

iShares ESG Aware  vs.  iShares SPTSX Small

iShares ESG Aware

Risk-Adjusted Performance

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in iShares ESG Aware are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy basic indicators, IShares ESG is not utilizing all of its potentials. The recent stock price disarray, may contribute to short-term losses for the investors.

iShares SPTSX Small

Risk-Adjusted Performance

Very Weak

Over the last 90 days iShares SPTSX Small has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest unfluctuating performance, the Etf's basic indicators remain healthy and the recent disarray on Wall Street may also be a sign of long period gains for the ETF investors.

Pair Trading with IShares ESG and IShares SPTSX

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

The idea behind iShares ESG Aware and iShares SPTSX Small 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 Premium Stories module to follow Macroaxis premium stories from verified contributors across different equity types, categories and coverage scope.