Correlation Between Basic Materials and IShares Ibovespa

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

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

Diversification Opportunities for Basic Materials and IShares Ibovespa

0.36

Correlation Coefficient

Basic Materials  IShares Ibovespa

Weak diversification

The 3 months correlation between Basic and IShares is 0.36. Overlapping area represents the amount of risk that can be diversified away by holding Basic Materials and iShares Ibovespa Index in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on iShares Ibovespa Index 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 IShares Ibovespa. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of iShares Ibovespa Index has no effect on the direction of Basic Materials i.e., Basic Materials and IShares Ibovespa go up and down completely randomly.

Pair Corralation between Basic Materials and IShares Ibovespa

Assuming the 90 days trading horizon Basic Materials is expected to under-perform the IShares Ibovespa. But the index apears to be less risky and, when comparing its historical volatility, Basic Materials is 1.2 times less risky than IShares Ibovespa. The index trades about -0.55 of its potential returns per unit of risk. The iShares Ibovespa Index is currently generating about -0.19 of returns per unit of risk over similar time horizon. If you would invest  12,376  in iShares Ibovespa Index on October 9, 2024 and sell it today you would lose (569.00) from holding iShares Ibovespa Index or give up 4.6% of portfolio value over 90 days.

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

Basic Materials  vs.  iShares Ibovespa Index

Pair Trading with Basic Materials and IShares Ibovespa

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

The idea behind Basic Materials and iShares Ibovespa Index 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 Earnings Calls module to check upcoming earnings announcements updated hourly across public exchanges.