Correlation Between Basic Materials and MetLife

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

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

Diversification Opportunities for Basic Materials and MetLife

0.42

Correlation Coefficient

Basic Materials  MetLife

Very weak diversification

The 3 months correlation between Basic and MetLife is 0.42. Overlapping area represents the amount of risk that can be diversified away by holding Basic Materials and MetLife in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on MetLife 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 MetLife. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of MetLife has no effect on the direction of Basic Materials i.e., Basic Materials and MetLife go up and down completely randomly.

Pair Corralation between Basic Materials and MetLife

Assuming the 90 days trading horizon Basic Materials is expected to under-perform the MetLife. But the index apears to be less risky and, when comparing its historical volatility, Basic Materials is 1.01 times less risky than MetLife. The index trades about -0.09 of its potential returns per unit of risk. The MetLife is currently generating about -0.05 of returns per unit of risk over similar time horizon. If you would invest  50,400  in MetLife on September 27, 2024 and sell it today you would lose (861.00) from holding MetLife or give up 1.71% of portfolio value over 90 days.

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

Basic Materials  vs.  MetLife

Pair Trading with Basic Materials and MetLife

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

The idea behind Basic Materials and MetLife 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 Crypto Correlations module to use cryptocurrency correlation module to diversify your cryptocurrency portfolio across multiple coins.