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

0.03

Correlation Coefficient

Basic Materials  Commodities Strategy

Significant diversification

The 3 months correlation between Basic and Commodities is 0.03. 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 under-perform the Commodities Strategy. In addition to that, Basic Materials is 7.33 times more volatile than Commodities Strategy Fund. It trades about -0.2 of its total potential returns per unit of risk. Commodities Strategy Fund is currently generating about 0.03 per unit of volatility. If you would invest  1,626  in Commodities Strategy Fund on September 24, 2024 and sell it today you would earn a total of  6.00  from holding Commodities Strategy Fund or generate 0.37% 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.  Commodities Strategy Fund

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 forward 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.

Commodities Strategy

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Commodities Strategy Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong forward-looking indicators, 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 Fundamental Analysis module to view fundamental data based on most recent published financial statements.