Correlation Between Basic Materials and EGX 33

Can any of the company-specific risk be diversified away by investing in both Basic Materials and EGX 33 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 EGX 33 into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Basic Materials and EGX 33 Shariah, you can compare the effects of market volatilities on Basic Materials and EGX 33 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 EGX 33. Check out your portfolio center. Please also check ongoing floating volatility patterns of Basic Materials and EGX 33.

Diversification Opportunities for Basic Materials and EGX 33

0.28

Correlation Coefficient

Basic Materials  EGX 33

Modest diversification

The 3 months correlation between Basic and EGX is 0.28. Overlapping area represents the amount of risk that can be diversified away by holding Basic Materials and EGX 33 Shariah in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on EGX 33 Shariah 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 EGX 33. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of EGX 33 Shariah has no effect on the direction of Basic Materials i.e., Basic Materials and EGX 33 go up and down completely randomly.

Pair Corralation between Basic Materials and EGX 33

Assuming the 90 days trading horizon Basic Materials is expected to generate 1.19 times less return on investment than EGX 33. But when comparing it to its historical volatility, Basic Materials is 1.04 times less risky than EGX 33. It trades about 0.08 of its potential returns per unit of risk. EGX 33 Shariah is currently generating about 0.09 of returns per unit of risk over similar time horizon. If you would invest  296,600  in EGX 33 Shariah on September 1, 2024 and sell it today you would earn a total of  16,434  from holding EGX 33 Shariah or generate 5.54% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	82.81%
Values	Daily Returns

Basic Materials  vs.  EGX 33 Shariah

Pair Trading with Basic Materials and EGX 33

The main advantage of trading using opposite Basic Materials and EGX 33 positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Basic Materials position performs unexpectedly, EGX 33 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 EGX 33 will offset losses from the drop in EGX 33's long position.

The idea behind Basic Materials and EGX 33 Shariah 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 Investing Opportunities module to build portfolios using our predefined set of ideas and optimize them against your investing preferences.