Correlation Between Select Sector and New Oriental

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

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

Diversification Opportunities for Select Sector and New Oriental

-0.47

Correlation Coefficient

Select Sector  New Oriental

Very good diversification

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

Pair Corralation between Select Sector and New Oriental

Assuming the 90 days trading horizon The Select Sector is expected to generate 0.85 times more return on investment than New Oriental. However, The Select Sector is 1.17 times less risky than New Oriental. It trades about 0.15 of its potential returns per unit of risk. New Oriental Education is currently generating about -0.03 per unit of risk. If you would invest  127,001  in The Select Sector on June 23, 2024 and sell it today you would earn a total of  27,569  from holding The Select Sector or generate 21.71% return on investment over 90 days.

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

The Select Sector  vs.  New Oriental Education

Select Sector

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in The Select Sector are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak basic indicators, Select Sector showed solid returns over the last few months and may actually be approaching a breakup point.

New Oriental Education

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days New Oriental Education has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong basic indicators, New Oriental is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Select Sector and New Oriental

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

The idea behind The Select Sector and New Oriental Education 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 Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.