Correlation Between Morningstar Defensive and Energy Basic

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

By analyzing existing cross correlation between Morningstar Defensive Bond and Energy Basic Materials, you can compare the effects of market volatilities on Morningstar Defensive and Energy Basic 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 Morningstar Defensive with a short position of Energy Basic. Check out your portfolio center. Please also check ongoing floating volatility patterns of Morningstar Defensive and Energy Basic.

Diversification Opportunities for Morningstar Defensive and Energy Basic

-0.16

Correlation Coefficient

Morningstar Defensive  Energy Basic

Good diversification

The 3 months correlation between Morningstar and Energy is -0.16. Overlapping area represents the amount of risk that can be diversified away by holding Morningstar Defensive Bond and Energy Basic Materials in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Energy Basic Materials and Morningstar Defensive 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 Morningstar Defensive Bond are associated (or correlated) with Energy Basic. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Energy Basic Materials has no effect on the direction of Morningstar Defensive i.e., Morningstar Defensive and Energy Basic go up and down completely randomly.

Pair Corralation between Morningstar Defensive and Energy Basic

Assuming the 90 days horizon Morningstar Defensive Bond is expected to generate 0.16 times more return on investment than Energy Basic. However, Morningstar Defensive Bond is 6.26 times less risky than Energy Basic. It trades about 0.17 of its potential returns per unit of risk. Energy Basic Materials is currently generating about 0.01 per unit of risk. If you would invest  893.00  in Morningstar Defensive Bond on September 13, 2024 and sell it today you would earn a total of  81.00  from holding Morningstar Defensive Bond or generate 9.07% return on investment over 90 days.

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

Morningstar Defensive Bond  vs.  Energy Basic Materials

Morningstar Defensive

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Morningstar Defensive Bond has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong fundamental drivers, Morningstar Defensive is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Energy Basic Materials

Risk-Adjusted Performance

0 of 100

Weak

Over the last 90 days Energy Basic Materials has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong fundamental drivers, Energy Basic is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Morningstar Defensive and Energy Basic

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

The idea behind Morningstar Defensive Bond and Energy Basic Materials 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.

Check out your portfolio center.

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 Dashboard module to portfolio dashboard that provides centralized access to all your investments.