Correlation Between Health Care and Financial Select

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

Diversification Opportunities for Health Care and Financial Select

0.32

Correlation Coefficient

Health Care  Financial Select

Weak diversification

The 3 months correlation between Health and Financial is 0.32. Overlapping area represents the amount of risk that can be diversified away by holding Health Care Select and Financial Select Sector in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Financial Select Sector 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 Financial Select. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Financial Select Sector has no effect on the direction of Health Care i.e., Health Care and Financial Select go up and down completely randomly.

Pair Corralation between Health Care and Financial Select

Considering the 90-day investment horizon Health Care is expected to generate 1.75 times less return on investment than Financial Select. But when comparing it to its historical volatility, Health Care Select is 1.08 times less risky than Financial Select. It trades about 0.11 of its potential returns per unit of risk. Financial Select Sector is currently generating about 0.18 of returns per unit of risk over similar time horizon. If you would invest  3,564  in Financial Select Sector on February 3, 2024 and sell it today you would earn a total of  482.00  from holding Financial Select Sector or generate 13.52% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	99.04%
Values	Daily Returns

Health Care Select  vs.  Financial Select Sector

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

Financial Select Sector

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Financial Select Sector are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable essential indicators, Financial Select is not utilizing all of its potentials. The newest stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with Health Care and Financial Select

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

The idea behind Health Care Select and Financial Select Sector 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.

Check out your portfolio center.

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 Insider Screener module to find insiders across different sectors to evaluate their impact on performance.