Correlation Between MicroSectors FANG and High Yield

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

By analyzing existing cross correlation between MicroSectors FANG Index and High Yield Municipal Fund, you can compare the effects of market volatilities on MicroSectors FANG and High Yield 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 MicroSectors FANG with a short position of High Yield. Check out your portfolio center. Please also check ongoing floating volatility patterns of MicroSectors FANG and High Yield.

Diversification Opportunities for MicroSectors FANG and High Yield

0.61

Correlation Coefficient

MicroSectors FANG  High Yield

Poor diversification

The 3 months correlation between MicroSectors and High is 0.61. Overlapping area represents the amount of risk that can be diversified away by holding MicroSectors FANG Index and High Yield Municipal Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on High Yield Municipal and MicroSectors FANG 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 MicroSectors FANG Index are associated (or correlated) with High Yield. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of High Yield Municipal has no effect on the direction of MicroSectors FANG i.e., MicroSectors FANG and High Yield go up and down completely randomly.

Pair Corralation between MicroSectors FANG and High Yield

Given the investment horizon of 90 days MicroSectors FANG Index is expected to under-perform the High Yield. In addition to that, MicroSectors FANG is 11.84 times more volatile than High Yield Municipal Fund. It trades about -0.18 of its total potential returns per unit of risk. High Yield Municipal Fund is currently generating about -0.21 per unit of volatility. If you would invest  880.00  in High Yield Municipal Fund on January 20, 2024 and sell it today you would lose (10.00) from holding High Yield Municipal Fund or give up 1.14% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	91.3%
Values	Daily Returns

MicroSectors FANG Index  vs.  High Yield Municipal Fund

MicroSectors FANG Index

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in MicroSectors FANG Index are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively conflicting technical and fundamental indicators, MicroSectors FANG unveiled solid returns over the last few months and may actually be approaching a breakup point.

High Yield Municipal

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in High Yield Municipal Fund are ranked lower than 6 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, High Yield is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with MicroSectors FANG and High Yield

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

The idea behind MicroSectors FANG Index and High Yield Municipal Fund 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.