Correlation Between Basic Materials and Energy Fund

Can any of the company-specific risk be diversified away by investing in both Basic Materials and Energy Fund 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 Energy Fund 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 Energy Fund Investor, you can compare the effects of market volatilities on Basic Materials and Energy Fund 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 Energy Fund. Check out your portfolio center. Please also check ongoing floating volatility patterns of Basic Materials and Energy Fund.

Diversification Opportunities for Basic Materials and Energy Fund

0.29

Correlation Coefficient

Basic Materials  Energy Fund

Modest diversification

The 3 months correlation between Basic and Energy is 0.29. Overlapping area represents the amount of risk that can be diversified away by holding Basic Materials Fund and Energy Fund Investor in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Energy Fund Investor 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 Energy Fund. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Energy Fund Investor has no effect on the direction of Basic Materials i.e., Basic Materials and Energy Fund go up and down completely randomly.

Pair Corralation between Basic Materials and Energy Fund

Assuming the 90 days horizon Basic Materials Fund is expected to generate 0.65 times more return on investment than Energy Fund. However, Basic Materials Fund is 1.53 times less risky than Energy Fund. It trades about 0.02 of its potential returns per unit of risk. Energy Fund Investor is currently generating about 0.01 per unit of risk. If you would invest  7,668  in Basic Materials Fund on September 14, 2024 and sell it today you would earn a total of  81.00  from holding Basic Materials Fund or generate 1.06% return on investment over 90 days.

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

Basic Materials Fund  vs.  Energy Fund Investor

Basic Materials

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Basic Materials Fund are ranked lower than 1 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Basic Materials is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Energy Fund Investor

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Energy Fund Investor has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong forward indicators, Energy Fund 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 Energy Fund

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

The idea behind Basic Materials Fund and Energy Fund Investor 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 Diagnostics module to use generated alerts and portfolio events aggregator to diagnose current holdings.