Correlation Between Basic Materials and Gilead Sciences

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

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

Diversification Opportunities for Basic Materials and Gilead Sciences

0.33

Correlation Coefficient

Basic Materials  Gilead Sciences

Weak diversification

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

Pair Corralation between Basic Materials and Gilead Sciences

Assuming the 90 days trading horizon Basic Materials is expected to under-perform the Gilead Sciences. But the index apears to be less risky and, when comparing its historical volatility, Basic Materials is 1.6 times less risky than Gilead Sciences. The index trades about -0.07 of its potential returns per unit of risk. The Gilead Sciences is currently generating about 0.23 of returns per unit of risk over similar time horizon. If you would invest  22,885  in Gilead Sciences on September 26, 2024 and sell it today you would earn a total of  5,871  from holding Gilead Sciences or generate 25.65% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	96.83%
Values	Daily Returns

Basic Materials  vs.  Gilead Sciences

Pair Trading with Basic Materials and Gilead Sciences

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

The idea behind Basic Materials and Gilead Sciences 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.

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 the Funds Screener module to find actively-traded funds from around the world traded on over 30 global exchanges.