Correlation Between Basic Materials and Visa

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

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

Diversification Opportunities for Basic Materials and Visa

-0.11

Correlation Coefficient

Basic Materials  Visa

Good diversification

The 3 months correlation between Basic and Visa is -0.11. Overlapping area represents the amount of risk that can be diversified away by holding Basic Materials and Visa Inc in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Visa Inc 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 Visa. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Visa Inc has no effect on the direction of Basic Materials i.e., Basic Materials and Visa go up and down completely randomly.

Pair Corralation between Basic Materials and Visa

Assuming the 90 days trading horizon Basic Materials is expected to under-perform the Visa. But the index apears to be less risky and, when comparing its historical volatility, Basic Materials is 1.15 times less risky than Visa. The index trades about -0.02 of its potential returns per unit of risk. The Visa Inc is currently generating about 0.09 of returns per unit of risk over similar time horizon. If you would invest  5,739  in Visa Inc on October 22, 2024 and sell it today you would earn a total of  4,259  from holding Visa Inc or generate 74.21% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	99.0%
Values	Daily Returns

Basic Materials  vs.  Visa Inc

Pair Trading with Basic Materials and Visa

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

The idea behind Basic Materials and Visa Inc 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 Global Correlations module to find global opportunities by holding instruments from different markets.