Correlation Between Basic Materials and T1SC34

Can any of the company-specific risk be diversified away by investing in both Basic Materials and T1SC34 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 T1SC34 into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Basic Materials and T1SC34, you can compare the effects of market volatilities on Basic Materials and T1SC34 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 T1SC34. Check out your portfolio center. Please also check ongoing floating volatility patterns of Basic Materials and T1SC34.

Diversification Opportunities for Basic Materials and T1SC34

0.01

Correlation Coefficient

Basic Materials  T1SC34

Significant diversification

The 3 months correlation between Basic and T1SC34 is 0.01. Overlapping area represents the amount of risk that can be diversified away by holding Basic Materials and T1SC34 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on T1SC34 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 T1SC34. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of T1SC34 has no effect on the direction of Basic Materials i.e., Basic Materials and T1SC34 go up and down completely randomly.

Pair Corralation between Basic Materials and T1SC34

Assuming the 90 days trading horizon Basic Materials is expected to under-perform the T1SC34. But the index apears to be less risky and, when comparing its historical volatility, Basic Materials is 1.88 times less risky than T1SC34. The index trades about -0.06 of its potential returns per unit of risk. The T1SC34 is currently generating about 0.14 of returns per unit of risk over similar time horizon. If you would invest  1,683  in T1SC34 on September 27, 2024 and sell it today you would earn a total of  205.00  from holding T1SC34 or generate 12.18% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Insignificant
Accuracy	97.62%
Values	Daily Returns

Basic Materials  vs.  T1SC34

Pair Trading with Basic Materials and T1SC34

The main advantage of trading using opposite Basic Materials and T1SC34 positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Basic Materials position performs unexpectedly, T1SC34 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 T1SC34 will offset losses from the drop in T1SC34's long position.

The idea behind Basic Materials and T1SC34 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 Anywhere module to track or share privately all of your investments from the convenience of any device.