Correlation Between MicroSectors FANG and IShares Regional

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

Diversification Opportunities for MicroSectors FANG and IShares Regional

0.82

Correlation Coefficient

MicroSectors FANG  IShares Regional

Very poor diversification

The 3 months correlation between MicroSectors and IShares is 0.82. Overlapping area represents the amount of risk that can be diversified away by holding MicroSectors FANG Index and iShares Regional Banks in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on iShares Regional Banks 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 IShares Regional. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of iShares Regional Banks has no effect on the direction of MicroSectors FANG i.e., MicroSectors FANG and IShares Regional go up and down completely randomly.

Pair Corralation between MicroSectors FANG and IShares Regional

Given the investment horizon of 90 days MicroSectors FANG Index is expected to generate 2.35 times more return on investment than IShares Regional. However, MicroSectors FANG is 2.35 times more volatile than iShares Regional Banks. It trades about 0.06 of its potential returns per unit of risk. iShares Regional Banks is currently generating about -0.03 per unit of risk. If you would invest  8,334  in MicroSectors FANG Index on February 27, 2025 and sell it today you would earn a total of  1,127  from holding MicroSectors FANG Index or generate 13.52% return on investment over 90 days.

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

MicroSectors FANG Index  vs.  iShares Regional Banks

MicroSectors FANG Index

Risk-Adjusted Performance

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in MicroSectors FANG Index are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. In spite of very uncertain technical and fundamental indicators, MicroSectors FANG displayed solid returns over the last few months and may actually be approaching a breakup point.

iShares Regional Banks

Risk-Adjusted Performance

Very Weak

Over the last 90 days iShares Regional Banks has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of comparatively stable basic indicators, IShares Regional is not utilizing all of its potentials. The recent stock price uproar, may contribute to short-horizon losses for the private investors.

Pair Trading with MicroSectors FANG and IShares Regional

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

The idea behind MicroSectors FANG Index and iShares Regional Banks 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 Transaction History module to view history of all your transactions and understand their impact on performance.