Correlation Between Basic Materials and Air Products

Can any of the company-specific risk be diversified away by investing in both Basic Materials and Air Products 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 Basic Materials and Air Products into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Basic Materials and Air Products and, you can compare the effects of market volatilities on Basic Materials and Air Products 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 Basic Materials with a short position of Air Products. Check out your portfolio center. Please also check ongoing floating volatility patterns of Basic Materials and Air Products.

Diversification Opportunities for Basic Materials and Air Products

0.33

Correlation Coefficient

Basic Materials  Air Products

Weak diversification

The 3 months correlation between Basic and Air is 0.33. Overlapping area represents the amount of risk that can be diversified away by holding Basic Materials and Air Products and in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Air Products and Basic Materials 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 Basic Materials are associated (or correlated) with Air Products. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Air Products has no effect on the direction of Basic Materials i.e., Basic Materials and Air Products go up and down completely randomly.

Pair Corralation between Basic Materials and Air Products

Assuming the 90 days trading horizon Basic Materials is expected to generate 599.5 times less return on investment than Air Products. But when comparing it to its historical volatility, Basic Materials is 1.55 times less risky than Air Products. It trades about 0.0 of its potential returns per unit of risk. Air Products and is currently generating about 0.14 of returns per unit of risk over similar time horizon. If you would invest  26,903  in Air Products and on October 2, 2024 and sell it today you would earn a total of  17,947  from holding Air Products and or generate 66.71% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	99.56%
Values	Daily Returns

Basic Materials  vs.  Air Products and

Pair Trading with Basic Materials and Air Products

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

The idea behind Basic Materials and Air Products and 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..