Correlation Between MicroSectors FANG and MicroAlgo

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

Diversification Opportunities for MicroSectors FANG and MicroAlgo

0.4

Correlation Coefficient

MicroSectors FANG  MicroAlgo

Very weak diversification

The 3 months correlation between MicroSectors and MicroAlgo is 0.4. Overlapping area represents the amount of risk that can be diversified away by holding MicroSectors FANG Index and MicroAlgo in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on MicroAlgo 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 MicroAlgo. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of MicroAlgo has no effect on the direction of MicroSectors FANG i.e., MicroSectors FANG and MicroAlgo go up and down completely randomly.

Pair Corralation between MicroSectors FANG and MicroAlgo

Given the investment horizon of 90 days MicroSectors FANG Index is expected to generate 0.73 times more return on investment than MicroAlgo. However, MicroSectors FANG Index is 1.38 times less risky than MicroAlgo. It trades about -0.14 of its potential returns per unit of risk. MicroAlgo is currently generating about -0.42 per unit of risk. If you would invest  33,311  in MicroSectors FANG Index on January 26, 2024 and sell it today you would lose (4,654) from holding MicroSectors FANG Index or give up 13.97% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	95.45%
Values	Daily Returns

MicroSectors FANG Index  vs.  MicroAlgo

MicroSectors FANG Index

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in MicroSectors FANG Index are ranked lower than 3 (%) 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.

MicroAlgo

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in MicroAlgo are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. In spite of very weak technical and fundamental indicators, MicroAlgo displayed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with MicroSectors FANG and MicroAlgo

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

The idea behind MicroSectors FANG Index and MicroAlgo 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 Price Ceiling Movement module to calculate and plot Price Ceiling Movement for different equity instruments.