Correlation Between T Rowe and SP 500

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Can any of the company-specific risk be diversified away by investing in both T Rowe and SP 500 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 T Rowe and SP 500 into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between T Rowe Price and SP 500 Technology, you can compare the effects of market volatilities on T Rowe and SP 500 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 T Rowe with a short position of SP 500. Check out your portfolio center. Please also check ongoing floating volatility patterns of T Rowe and SP 500.

Diversification Opportunities for T Rowe and SP 500

0.88
  Correlation Coefficient

Very poor diversification

The 3 months correlation between TRRJX and SP 500 is 0.88. Overlapping area represents the amount of risk that can be diversified away by holding T Rowe Price and SP 500 Technology in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on SP 500 Technology and T Rowe 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 T Rowe Price are associated (or correlated) with SP 500. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of SP 500 Technology has no effect on the direction of T Rowe i.e., T Rowe and SP 500 go up and down completely randomly.

Pair Corralation between T Rowe and SP 500

Assuming the 90 days horizon T Rowe is expected to generate 2.08 times less return on investment than SP 500. But when comparing it to its historical volatility, T Rowe Price is 1.48 times less risky than SP 500. It trades about 0.03 of its potential returns per unit of risk. SP 500 Technology is currently generating about 0.04 of returns per unit of risk over similar time horizon. If you would invest  11,455  in SP 500 Technology on May 12, 2022 and sell it today you would earn a total of  3,370  from holding SP 500 Technology or generate 29.42% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthStrong
Accuracy100.0%
ValuesDaily Returns

T Rowe Price  vs.  SP 500 Technology

 Performance (%) 
       Timeline  
T Rowe Price 
TRRJX Performance
5 of 100
Compared to the overall equity markets, risk-adjusted returns on investments in T Rowe Price are ranked lower than 5 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong forward-looking indicators, T Rowe is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

TRRJX Price Channel

SP 500 Technology 
SP 500 Performance
8 of 100
Compared to the overall equity markets, risk-adjusted returns on investments in SP 500 Technology are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. Despite fairly unsteady essential indicators, SP 500 demonstrated solid returns over the last few months and may actually be approaching a breakup point.

SP 500 Price Channel

T Rowe and SP 500 Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with T Rowe and SP 500

The main advantage of trading using opposite T Rowe and SP 500 positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if T Rowe position performs unexpectedly, SP 500 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 SP 500 will offset losses from the drop in SP 500's long position.

T Rowe Price

Pair trading matchups for T Rowe

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The effect of pair diversification on risk is to reduce it, but we should note this doesn't apply to all risk types. When we trade pairs against T Rowe as a counterpart, there is always some inherent risk that will never be diversified away no matter what. This volatility limits the effect of tactical diversification using pair trading. T Rowe's systematic risk is the inherent uncertainty of the entire market, and therefore cannot be mitigated even by pair-trading it against the equity that is not highly correlated to it. On the other hand, T Rowe's unsystematic risk describes the types of risk that we can protect against, at least to some degree, by selecting a matching pair that is not perfectly correlated to T Rowe Price.
The idea behind T Rowe Price and SP 500 Technology 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.

SP 500 Technology

Pair trading matchups for SP 500

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 Bond Analysis module to evaluate and analyze corporate bonds as a potential investment for your portfolios..

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