Correlation Between IShares MSCI and Invesco Water

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

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

Diversification Opportunities for IShares MSCI and Invesco Water

0.74

Correlation Coefficient

IShares MSCI  Invesco Water

Poor diversification

The 3 months correlation between IShares and Invesco is 0.74. Overlapping area represents the amount of risk that can be diversified away by holding iShares MSCI Global and Invesco Water Resources in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Invesco Water Resources and IShares MSCI 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 MSCI Global are associated (or correlated) with Invesco Water. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Invesco Water Resources has no effect on the direction of IShares MSCI i.e., IShares MSCI and Invesco Water go up and down completely randomly.

Pair Corralation between IShares MSCI and Invesco Water

Given the investment horizon of 90 days iShares MSCI Global is expected to generate 1.87 times more return on investment than Invesco Water. However, IShares MSCI is 1.87 times more volatile than Invesco Water Resources. It trades about 0.07 of its potential returns per unit of risk. Invesco Water Resources is currently generating about 0.08 per unit of risk. If you would invest  1,877  in iShares MSCI Global on June 22, 2024 and sell it today you would earn a total of  1,434  from holding iShares MSCI Global or generate 76.4% return on investment over 90 days.

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

iShares MSCI Global  vs.  Invesco Water Resources

iShares MSCI Global

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in iShares MSCI Global are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. Despite nearly weak basic indicators, IShares MSCI reported solid returns over the last few months and may actually be approaching a breakup point.

Invesco Water Resources

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Invesco Water Resources are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of very abnormal technical indicators, Invesco Water may actually be approaching a critical reversion point that can send shares even higher in October 2024.

Pair Trading with IShares MSCI and Invesco Water

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

The idea behind iShares MSCI Global and Invesco Water Resources 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 Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.