Correlation Between Basic Materials and Commodities Strategy

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

Diversification Opportunities for Basic Materials and Commodities Strategy

0.58

Correlation Coefficient

Basic Materials  Commodities Strategy

Very weak diversification

The 3 months correlation between Basic and Commodities is 0.58. Overlapping area represents the amount of risk that can be diversified away by holding Basic Materials Fund and Commodities Strategy Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Commodities Strategy 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 Commodities Strategy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Commodities Strategy has no effect on the direction of Basic Materials i.e., Basic Materials and Commodities Strategy go up and down completely randomly.

Pair Corralation between Basic Materials and Commodities Strategy

Assuming the 90 days horizon Basic Materials Fund is expected to generate 1.32 times more return on investment than Commodities Strategy. However, Basic Materials is 1.32 times more volatile than Commodities Strategy Fund. It trades about 0.11 of its potential returns per unit of risk. Commodities Strategy Fund is currently generating about 0.07 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  470.00  from holding Basic Materials Fund or generate 6.5% return on investment over 90 days.

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

Basic Materials Fund  vs.  Commodities Strategy Fund

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.

Commodities Strategy

Risk-Adjusted Performance

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Commodities Strategy Fund are ranked lower than 5 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong fundamental drivers, Commodities Strategy 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 Commodities Strategy

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

The idea behind Basic Materials Fund and Commodities Strategy Fund 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 Fundamentals Comparison module to compare fundamentals across multiple equities to find investing opportunities.