Correlation Between Basic Materials and Inverse Emerging

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

Diversification Opportunities for Basic Materials and Inverse Emerging

-0.14
  Correlation Coefficient

Good diversification

The 3 months correlation between Basic and Inverse is -0.14. Overlapping area represents the amount of risk that can be diversified away by holding Basic Materials Fund and Inverse Emerging Markets in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Inverse Emerging Markets 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 Inverse Emerging. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Inverse Emerging Markets has no effect on the direction of Basic Materials i.e., Basic Materials and Inverse Emerging go up and down completely randomly.

Pair Corralation between Basic Materials and Inverse Emerging

Assuming the 90 days horizon Basic Materials Fund is expected to under-perform the Inverse Emerging. In addition to that, Basic Materials is 1.1 times more volatile than Inverse Emerging Markets. It trades about -0.09 of its total potential returns per unit of risk. Inverse Emerging Markets is currently generating about -0.02 per unit of volatility. If you would invest  924.00  in Inverse Emerging Markets on September 21, 2024 and sell it today you would lose (49.00) from holding Inverse Emerging Markets or give up 5.3% of portfolio value over 90 days.
Time Period3 Months [change]
DirectionMoves Against 
StrengthInsignificant
Accuracy98.44%
ValuesDaily Returns

Basic Materials Fund  vs.  Inverse Emerging Markets

 Performance 
       Timeline  
Basic Materials 

Risk-Adjusted Performance

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Weak
 
Strong
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.
Inverse Emerging Markets 

Risk-Adjusted Performance

0 of 100

 
Weak
 
Strong
Very Weak
Over the last 90 days Inverse Emerging Markets has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, Inverse Emerging is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Basic Materials and Inverse Emerging Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Basic Materials and Inverse Emerging

The main advantage of trading using opposite Basic Materials and Inverse Emerging positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Basic Materials position performs unexpectedly, Inverse Emerging 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 Inverse Emerging will offset losses from the drop in Inverse Emerging's long position.
The idea behind Basic Materials Fund and Inverse Emerging Markets 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 File Import module to quickly import all of your third-party portfolios from your local drive in csv format.

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