Correlation Between Basic Materials and Sp Midcap

Can any of the company-specific risk be diversified away by investing in both Basic Materials and Sp Midcap 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 Sp Midcap 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 Sp Midcap 400, you can compare the effects of market volatilities on Basic Materials and Sp Midcap 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 Sp Midcap. Check out your portfolio center. Please also check ongoing floating volatility patterns of Basic Materials and Sp Midcap.

Diversification Opportunities for Basic Materials and Sp Midcap

0.03

Correlation Coefficient

Basic Materials  Sp Midcap

Significant diversification

The 3 months correlation between Basic and RYCKX is 0.03. Overlapping area represents the amount of risk that can be diversified away by holding Basic Materials Fund and Sp Midcap 400 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Sp Midcap 400 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 Sp Midcap. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Sp Midcap 400 has no effect on the direction of Basic Materials i.e., Basic Materials and Sp Midcap go up and down completely randomly.

Pair Corralation between Basic Materials and Sp Midcap

Assuming the 90 days horizon Basic Materials Fund is expected to generate 0.77 times more return on investment than Sp Midcap. However, Basic Materials Fund is 1.3 times less risky than Sp Midcap. It trades about 0.11 of its potential returns per unit of risk. Sp Midcap 400 is currently generating about -0.12 per unit of risk. If you would invest  7,232  in Basic Materials Fund on December 28, 2024 and sell it today you would earn a total of  484.00  from holding Basic Materials Fund or generate 6.69% return on investment over 90 days.

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

Basic Materials Fund  vs.  Sp Midcap 400

Basic Materials

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Basic Materials Fund are ranked lower than 8 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak forward indicators, Basic Materials may actually be approaching a critical reversion point that can send shares even higher in April 2025.

Sp Midcap 400

Risk-Adjusted Performance

Very Weak

Over the last 90 days Sp Midcap 400 has generated negative risk-adjusted returns adding no value to fund investors. In spite of latest weak performance, the Fund's forward-looking signals 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 Sp Midcap

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

The idea behind Basic Materials Fund and Sp Midcap 400 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 Suggestion module to get suggestions outside of your existing asset allocation including your own model portfolios.