Correlation Between IShares Basic and IShares Consumer

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

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

Diversification Opportunities for IShares Basic and IShares Consumer

0.4

Correlation Coefficient

IShares Basic  IShares Consumer

Very weak diversification

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

Pair Corralation between IShares Basic and IShares Consumer

Considering the 90-day investment horizon iShares Basic Materials is expected to generate 1.05 times more return on investment than IShares Consumer. However, IShares Basic is 1.05 times more volatile than iShares Consumer Discretionary. It trades about 0.13 of its potential returns per unit of risk. iShares Consumer Discretionary is currently generating about 0.12 per unit of risk. If you would invest  12,868  in iShares Basic Materials on February 21, 2024 and sell it today you would earn a total of  1,868  from holding iShares Basic Materials or generate 14.52% return on investment over 90 days.

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

iShares Basic Materials  vs.  iShares Consumer Discretionary

iShares Basic Materials

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in iShares Basic Materials are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. In spite of very inconsistent basic indicators, IShares Basic may actually be approaching a critical reversion point that can send shares even higher in June 2024.

iShares Consumer Dis

Risk-Adjusted Performance

3 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in iShares Consumer Discretionary are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound basic indicators, IShares Consumer is not utilizing all of its potentials. The recent stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with IShares Basic and IShares Consumer

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

The idea behind iShares Basic Materials and iShares Consumer Discretionary 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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.