Correlation Between ProShares UltraPro and Direxion Daily

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Can any of the company-specific risk be diversified away by investing in both ProShares UltraPro and Direxion Daily 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 ProShares UltraPro and Direxion Daily into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between ProShares UltraPro SP500 and Direxion Daily Select, you can compare the effects of market volatilities on ProShares UltraPro and Direxion Daily 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 ProShares UltraPro with a short position of Direxion Daily. Check out your portfolio center. Please also check ongoing floating volatility patterns of ProShares UltraPro and Direxion Daily.

Diversification Opportunities for ProShares UltraPro and Direxion Daily

0.45
  Correlation Coefficient

Very weak diversification

The 3 months correlation between ProShares and Direxion is 0.45. Overlapping area represents the amount of risk that can be diversified away by holding ProShares UltraPro SP500 and Direxion Daily Select in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Direxion Daily Select and ProShares UltraPro 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 ProShares UltraPro SP500 are associated (or correlated) with Direxion Daily. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Direxion Daily Select has no effect on the direction of ProShares UltraPro i.e., ProShares UltraPro and Direxion Daily go up and down completely randomly.

Pair Corralation between ProShares UltraPro and Direxion Daily

Given the investment horizon of 90 days ProShares UltraPro SP500 is expected to generate 0.58 times more return on investment than Direxion Daily. However, ProShares UltraPro SP500 is 1.71 times less risky than Direxion Daily. It trades about 0.02 of its potential returns per unit of risk. Direxion Daily Select is currently generating about -0.07 per unit of risk. If you would invest  3,682  in ProShares UltraPro SP500 on September 7, 2022 and sell it today you would earn a total of  77.00  from holding ProShares UltraPro SP500 or generate 2.09% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthWeak
Accuracy60.08%
ValuesDaily Returns

ProShares UltraPro SP500  vs.  Direxion Daily Select

 Performance (%) 
       Timeline  
ProShares UltraPro SP500 
ProShares Performance
0 of 100
Over the last 90 days ProShares UltraPro SP500 has generated negative risk-adjusted returns adding no value to investors with long positions. Despite quite persistent basic indicators, ProShares UltraPro is not utilizing all of its potentials. The current stock price mess, may contribute to short-term losses for the institutional investors.

ProShares Price Channel

Direxion Daily Select 
Direxion Performance
0 of 100
Over the last 90 days Direxion Daily Select has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of weak performance in the last few months, the Etf's technical and fundamental indicators remain rather sound which may send shares a bit higher in January 2023. The latest tumult may also be a sign of longer-term up-swing for the fund shareholders.

Direxion Price Channel

ProShares UltraPro and Direxion Daily Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with ProShares UltraPro and Direxion Daily

The main advantage of trading using opposite ProShares UltraPro and Direxion Daily positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if ProShares UltraPro position performs unexpectedly, Direxion Daily 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 Direxion Daily will offset losses from the drop in Direxion Daily's long position.
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 ProShares UltraPro 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. ProShares UltraPro'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, ProShares UltraPro'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 ProShares UltraPro SP500.
The idea behind ProShares UltraPro SP500 and Direxion Daily Select 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.
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 Direxion Daily 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. Direxion Daily'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, Direxion Daily'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 Direxion Daily Select.
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 Technical Analysis module to check basic technical indicators and analysis based on most latest market data.

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