Correlation Between Basic Materials and FDO INV

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

By analyzing existing cross correlation between Basic Materials and FDO INV CAD, you can compare the effects of market volatilities on Basic Materials and FDO INV 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 FDO INV. Check out your portfolio center. Please also check ongoing floating volatility patterns of Basic Materials and FDO INV.

Diversification Opportunities for Basic Materials and FDO INV

-0.41

Correlation Coefficient

Basic Materials  FDO INV

Very good diversification

The 3 months correlation between Basic and FDO is -0.41. Overlapping area represents the amount of risk that can be diversified away by holding Basic Materials and FDO INV CAD in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on FDO INV CAD 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 FDO INV. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of FDO INV CAD has no effect on the direction of Basic Materials i.e., Basic Materials and FDO INV go up and down completely randomly.

Pair Corralation between Basic Materials and FDO INV

Assuming the 90 days trading horizon Basic Materials is expected to under-perform the FDO INV. But the index apears to be less risky and, when comparing its historical volatility, Basic Materials is 2.31 times less risky than FDO INV. The index trades about -0.16 of its potential returns per unit of risk. The FDO INV CAD is currently generating about 0.08 of returns per unit of risk over similar time horizon. If you would invest  730.00  in FDO INV CAD on December 4, 2024 and sell it today you would earn a total of  78.00  from holding FDO INV CAD or generate 10.68% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Very Weak
Accuracy	81.67%
Values	Daily Returns

Basic Materials  vs.  FDO INV CAD

Pair Trading with Basic Materials and FDO INV

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

The idea behind Basic Materials and FDO INV CAD 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 Equity Forecasting module to use basic forecasting models to generate price predictions and determine price momentum.