Correlation Between Basic Materials and Retailing Fund

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

Diversification Opportunities for Basic Materials and Retailing Fund

0.41

Correlation Coefficient

Basic Materials  Retailing Fund

Very weak diversification

The 3 months correlation between Basic and Retailing is 0.41. Overlapping area represents the amount of risk that can be diversified away by holding Basic Materials Fund and Retailing Fund Class in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Retailing Fund Class 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 Retailing Fund. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Retailing Fund Class has no effect on the direction of Basic Materials i.e., Basic Materials and Retailing Fund go up and down completely randomly.

Pair Corralation between Basic Materials and Retailing Fund

Assuming the 90 days horizon Basic Materials Fund is expected to generate 0.93 times more return on investment than Retailing Fund. However, Basic Materials Fund is 1.07 times less risky than Retailing Fund. It trades about 0.06 of its potential returns per unit of risk. Retailing Fund Class is currently generating about -0.1 per unit of risk. If you would invest  5,316  in Basic Materials Fund on December 22, 2024 and sell it today you would earn a total of  191.00  from holding Basic Materials Fund or generate 3.59% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	98.36%
Values	Daily Returns

Basic Materials Fund  vs.  Retailing Fund Class

Basic Materials

Risk-Adjusted Performance

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Basic Materials Fund are ranked lower than 4 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong fundamental indicators, Basic Materials is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Retailing Fund Class

Risk-Adjusted Performance

Very Weak

Over the last 90 days Retailing Fund Class has generated negative risk-adjusted returns adding no value to fund investors. In spite of latest weak performance, the Fund's fundamental indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the fund investors.

Pair Trading with Basic Materials and Retailing Fund

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

The idea behind Basic Materials Fund and Retailing Fund Class 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 Options Analysis module to analyze and evaluate options and option chains as a potential hedge for your portfolios.