Correlation Between SPDR SP and IShares Transportation

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

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

Diversification Opportunities for SPDR SP and IShares Transportation

0.92

Correlation Coefficient

SPDR SP  IShares Transportation

Almost no diversification

The 3 months correlation between SPDR and IShares is 0.92. Overlapping area represents the amount of risk that can be diversified away by holding SPDR SP Regional and iShares Transportation Average in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on iShares Transportation and SPDR SP 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 SPDR SP Regional are associated (or correlated) with IShares Transportation. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of iShares Transportation has no effect on the direction of SPDR SP i.e., SPDR SP and IShares Transportation go up and down completely randomly.

Pair Corralation between SPDR SP and IShares Transportation

Considering the 90-day investment horizon SPDR SP Regional is expected to generate 1.64 times more return on investment than IShares Transportation. However, SPDR SP is 1.64 times more volatile than iShares Transportation Average. It trades about 0.07 of its potential returns per unit of risk. iShares Transportation Average is currently generating about 0.05 per unit of risk. If you would invest  4,713  in SPDR SP Regional on August 29, 2024 and sell it today you would earn a total of  2,081  from holding SPDR SP Regional or generate 44.15% return on investment over 90 days.

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

SPDR SP Regional  vs.  iShares Transportation Average

SPDR SP Regional

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in SPDR SP Regional are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady basic indicators, SPDR SP exhibited solid returns over the last few months and may actually be approaching a breakup point.

iShares Transportation

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in iShares Transportation Average are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively weak basic indicators, IShares Transportation may actually be approaching a critical reversion point that can send shares even higher in December 2024.

Pair Trading with SPDR SP and IShares Transportation

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

The idea behind SPDR SP Regional and iShares Transportation Average 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 Efficient Frontier module to plot and analyze your portfolio and positions against risk-return landscape of the market..