Correlation Between Basic Materials and ICEX Main

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

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

Diversification Opportunities for Basic Materials and ICEX Main

0.64

Correlation Coefficient

Basic Materials  ICEX Main

Poor diversification

The 3 months correlation between Basic and ICEX is 0.64. Overlapping area represents the amount of risk that can be diversified away by holding Basic Materials and ICEX Main in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on ICEX Main 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 ICEX Main. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of ICEX Main has no effect on the direction of Basic Materials i.e., Basic Materials and ICEX Main go up and down completely randomly.

Pair Corralation between Basic Materials and ICEX Main

Assuming the 90 days trading horizon Basic Materials is expected to generate 3.46 times less return on investment than ICEX Main. In addition to that, Basic Materials is 1.57 times more volatile than ICEX Main. It trades about 0.05 of its total potential returns per unit of risk. ICEX Main is currently generating about 0.25 per unit of volatility. If you would invest  204,248  in ICEX Main on August 30, 2024 and sell it today you would earn a total of  25,966  from holding ICEX Main or generate 12.71% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	98.44%
Values	Daily Returns

Basic Materials  vs.  ICEX Main

Pair Trading with Basic Materials and ICEX Main

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

The idea behind Basic Materials and ICEX Main 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 Portfolio Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.