Correlation Between Basic Materials and Nasdaq-100(r)

Can any of the company-specific risk be diversified away by investing in both Basic Materials and Nasdaq-100(r) 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 Nasdaq-100(r) 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 Nasdaq 100 2x Strategy, you can compare the effects of market volatilities on Basic Materials and Nasdaq-100(r) 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 Nasdaq-100(r). Check out your portfolio center. Please also check ongoing floating volatility patterns of Basic Materials and Nasdaq-100(r).

Diversification Opportunities for Basic Materials and Nasdaq-100(r)

0.05

Correlation Coefficient

Basic Materials  Nasdaq-100(r)

Significant diversification

The 3 months correlation between Basic and Nasdaq-100(r) is 0.05. Overlapping area represents the amount of risk that can be diversified away by holding Basic Materials Fund and Nasdaq 100 2x Strategy in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Nasdaq 100 2x 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 Nasdaq-100(r). Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Nasdaq 100 2x has no effect on the direction of Basic Materials i.e., Basic Materials and Nasdaq-100(r) go up and down completely randomly.

Pair Corralation between Basic Materials and Nasdaq-100(r)

Assuming the 90 days horizon Basic Materials Fund is expected to under-perform the Nasdaq-100(r). But the mutual fund apears to be less risky and, when comparing its historical volatility, Basic Materials Fund is 1.8 times less risky than Nasdaq-100(r). The mutual fund trades about -0.02 of its potential returns per unit of risk. The Nasdaq 100 2x Strategy is currently generating about 0.09 of returns per unit of risk over similar time horizon. If you would invest  22,144  in Nasdaq 100 2x Strategy on October 13, 2024 and sell it today you would earn a total of  31,915  from holding Nasdaq 100 2x Strategy or generate 144.12% return on investment over 90 days.

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

Basic Materials Fund  vs.  Nasdaq 100 2x 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 February 2025. The current disturbance may also be a sign of long term up-swing for the fund investors.

Nasdaq 100 2x

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Nasdaq 100 2x Strategy has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong essential indicators, Nasdaq-100(r) 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 Nasdaq-100(r)

The main advantage of trading using opposite Basic Materials and Nasdaq-100(r) positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Basic Materials position performs unexpectedly, Nasdaq-100(r) 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 Nasdaq-100(r) will offset losses from the drop in Nasdaq-100(r)'s long position.

The idea behind Basic Materials Fund and Nasdaq 100 2x 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 Portfolio Dashboard module to portfolio dashboard that provides centralized access to all your investments.