Correlation Between Industrial Select and United States

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

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

Diversification Opportunities for Industrial Select and United States

0.78

Correlation Coefficient

Industrial Select  United States

Poor diversification

The 3 months correlation between Industrial and United is 0.78. Overlapping area represents the amount of risk that can be diversified away by holding Industrial Select Sector and United States Gasoline in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on United States Gasoline and Industrial Select 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 Industrial Select Sector are associated (or correlated) with United States. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of United States Gasoline has no effect on the direction of Industrial Select i.e., Industrial Select and United States go up and down completely randomly.

Pair Corralation between Industrial Select and United States

Considering the 90-day investment horizon Industrial Select is expected to generate 2.27 times less return on investment than United States. But when comparing it to its historical volatility, Industrial Select Sector is 2.06 times less risky than United States. It trades about 0.12 of its potential returns per unit of risk. United States Gasoline is currently generating about 0.13 of returns per unit of risk over similar time horizon. If you would invest  6,110  in United States Gasoline on February 2, 2024 and sell it today you would earn a total of  726.00  from holding United States Gasoline or generate 11.88% return on investment over 90 days.

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

Industrial Select Sector  vs.  United States Gasoline

Industrial Select Sector

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Industrial Select Sector are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. Despite fairly strong essential indicators, Industrial Select is not utilizing all of its potentials. The latest stock price confusion, may contribute to short-horizon losses for the traders.

United States Gasoline

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in United States Gasoline are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. Despite somewhat conflicting technical and fundamental indicators, United States may actually be approaching a critical reversion point that can send shares even higher in June 2024.

Pair Trading with Industrial Select and United States

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

The idea behind Industrial Select Sector and United States Gasoline 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 Idea Breakdown module to analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes.