Correlation Between MicroSectors FANG and ProShares UltraShort

Can any of the company-specific risk be diversified away by investing in both MicroSectors FANG and ProShares UltraShort 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 ProShares UltraShort 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 ProShares UltraShort Dow30, you can compare the effects of market volatilities on MicroSectors FANG and ProShares UltraShort 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 ProShares UltraShort. Check out your portfolio center. Please also check ongoing floating volatility patterns of MicroSectors FANG and ProShares UltraShort.

Diversification Opportunities for MicroSectors FANG and ProShares UltraShort

-0.56

Correlation Coefficient

MicroSectors FANG  ProShares UltraShort

Excellent diversification

The 3 months correlation between MicroSectors and ProShares is -0.56. Overlapping area represents the amount of risk that can be diversified away by holding MicroSectors FANG Index and ProShares UltraShort Dow30 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on ProShares UltraShort 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 ProShares UltraShort. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of ProShares UltraShort has no effect on the direction of MicroSectors FANG i.e., MicroSectors FANG and ProShares UltraShort go up and down completely randomly.

Pair Corralation between MicroSectors FANG and ProShares UltraShort

Given the investment horizon of 90 days MicroSectors FANG Index is expected to generate 3.17 times more return on investment than ProShares UltraShort. However, MicroSectors FANG is 3.17 times more volatile than ProShares UltraShort Dow30. It trades about 0.09 of its potential returns per unit of risk. ProShares UltraShort Dow30 is currently generating about -0.07 per unit of risk. If you would invest  44,511  in MicroSectors FANG Index on September 26, 2024 and sell it today you would earn a total of  22,089  from holding MicroSectors FANG Index or generate 49.63% return on investment over 90 days.

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

MicroSectors FANG Index  vs.  ProShares UltraShort Dow30

MicroSectors FANG Index

Risk-Adjusted Performance

15 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in MicroSectors FANG Index are ranked lower than 15 (%) 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.

ProShares UltraShort

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days ProShares UltraShort Dow30 has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound basic indicators, ProShares UltraShort is not utilizing all of its potentials. The newest stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with MicroSectors FANG and ProShares UltraShort

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

The idea behind MicroSectors FANG Index and ProShares UltraShort Dow30 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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.