Correlation Between Health Care and Vanguard Industrials

Can any of the company-specific risk be diversified away by investing in both Health Care and Vanguard Industrials 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 Vanguard Industrials 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 Vanguard Industrials Index, you can compare the effects of market volatilities on Health Care and Vanguard Industrials 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 Vanguard Industrials. Check out your portfolio center. Please also check ongoing floating volatility patterns of Health Care and Vanguard Industrials.

Diversification Opportunities for Health Care and Vanguard Industrials

0.47

Correlation Coefficient

Health Care  Vanguard Industrials

Very weak diversification

The 3 months correlation between Health and Vanguard is 0.47. Overlapping area represents the amount of risk that can be diversified away by holding Health Care Select and Vanguard Industrials Index in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Vanguard Industrials 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 Vanguard Industrials. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Vanguard Industrials has no effect on the direction of Health Care i.e., Health Care and Vanguard Industrials go up and down completely randomly.

Pair Corralation between Health Care and Vanguard Industrials

Considering the 90-day investment horizon Health Care is expected to generate 1.94 times less return on investment than Vanguard Industrials. But when comparing it to its historical volatility, Health Care Select is 1.31 times less risky than Vanguard Industrials. It trades about 0.05 of its potential returns per unit of risk. Vanguard Industrials Index is currently generating about 0.08 of returns per unit of risk over similar time horizon. If you would invest  15,756  in Vanguard Industrials Index on March 12, 2024 and sell it today you would earn a total of  7,841  from holding Vanguard Industrials Index or generate 49.77% return on investment over 90 days.

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

Health Care Select  vs.  Vanguard Industrials Index

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 newest stock price fuss, may contribute to near-short-term losses for the sophisticated investors.

Vanguard Industrials

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Vanguard Industrials Index has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of comparatively stable forward indicators, Vanguard Industrials is not utilizing all of its potentials. The recent stock price uproar, may contribute to short-horizon losses for the private investors.

Pair Trading with Health Care and Vanguard Industrials

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

The idea behind Health Care Select and Vanguard Industrials Index 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 Equity Forecasting module to use basic forecasting models to generate price predictions and determine price momentum.