Correlation Between Basic Materials and Mid Cap

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

By analyzing existing cross correlation between Basic Materials Fund and Mid Cap 15x Strategy, you can compare the effects of market volatilities on Basic Materials and Mid Cap 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 Mid Cap. Check out your portfolio center. Please also check ongoing floating volatility patterns of Basic Materials and Mid Cap.

Diversification Opportunities for Basic Materials and Mid Cap

0.22

Correlation Coefficient

Basic Materials  Mid Cap

Modest diversification

The 3 months correlation between Basic and Mid is 0.22. Overlapping area represents the amount of risk that can be diversified away by holding Basic Materials Fund and Mid Cap 15x Strategy in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Mid Cap 15x 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 Fund are associated (or correlated) with Mid Cap. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Mid Cap 15x has no effect on the direction of Basic Materials i.e., Basic Materials and Mid Cap go up and down completely randomly.

Pair Corralation between Basic Materials and Mid Cap

Assuming the 90 days horizon Basic Materials Fund is expected to under-perform the Mid Cap. In addition to that, Basic Materials is 3.7 times more volatile than Mid Cap 15x Strategy. It trades about -0.16 of its total potential returns per unit of risk. Mid Cap 15x Strategy is currently generating about -0.36 per unit of volatility. If you would invest  11,978  in Mid Cap 15x Strategy on September 27, 2024 and sell it today you would lose (1,259) from holding Mid Cap 15x Strategy or give up 10.51% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	100.0%
Values	Daily Returns

Basic Materials Fund  vs.  Mid Cap 15x Strategy

Basic Materials

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Basic Materials Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of weak performance in the last few months, the Fund's basic indicators remain fairly strong which may send shares a bit higher in January 2025. The current disturbance may also be a sign of long term up-swing for the fund investors.

Mid Cap 15x

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Mid Cap 15x Strategy has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong fundamental indicators, Mid Cap is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Basic Materials and Mid Cap

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

The idea behind Basic Materials Fund and Mid Cap 15x Strategy 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 Correlation Analysis module to reduce portfolio risk simply by holding instruments which are not perfectly correlated.