Correlation Between Basic Materials and Inverse Nasdaq-100

Can any of the company-specific risk be diversified away by investing in both Basic Materials and Inverse Nasdaq-100 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 Nasdaq-100 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 Nasdaq 100 Strategy, you can compare the effects of market volatilities on Basic Materials and Inverse Nasdaq-100 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 Nasdaq-100. Check out your portfolio center. Please also check ongoing floating volatility patterns of Basic Materials and Inverse Nasdaq-100.

Diversification Opportunities for Basic Materials and Inverse Nasdaq-100

-0.06

Correlation Coefficient

Basic Materials  Inverse Nasdaq-100

Good diversification

The 3 months correlation between Basic and Inverse is -0.06. Overlapping area represents the amount of risk that can be diversified away by holding Basic Materials Fund and Inverse Nasdaq 100 Strategy in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Inverse Nasdaq 100 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 Nasdaq-100. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Inverse Nasdaq 100 has no effect on the direction of Basic Materials i.e., Basic Materials and Inverse Nasdaq-100 go up and down completely randomly.

Pair Corralation between Basic Materials and Inverse Nasdaq-100

Assuming the 90 days horizon Basic Materials Fund is expected to under-perform the Inverse Nasdaq-100. But the mutual fund apears to be less risky and, when comparing its historical volatility, Basic Materials Fund is 78.66 times less risky than Inverse Nasdaq-100. The mutual fund trades about -0.13 of its potential returns per unit of risk. The Inverse Nasdaq 100 Strategy is currently generating about 0.18 of returns per unit of risk over similar time horizon. If you would invest  1,082  in Inverse Nasdaq 100 Strategy on November 28, 2024 and sell it today you would earn a total of  9,606  from holding Inverse Nasdaq 100 Strategy or generate 887.8% return on investment over 90 days.

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

Basic Materials Fund  vs.  Inverse Nasdaq 100 Strategy

Basic Materials

Risk-Adjusted Performance

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 primary indicators remain fairly strong which may send shares a bit higher in March 2025. The current disturbance may also be a sign of long term up-swing for the fund investors.

Inverse Nasdaq 100

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Inverse Nasdaq 100 Strategy are ranked lower than 13 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak fundamental indicators, Inverse Nasdaq-100 showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Basic Materials and Inverse Nasdaq-100

The main advantage of trading using opposite Basic Materials and Inverse Nasdaq-100 positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Basic Materials position performs unexpectedly, Inverse Nasdaq-100 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 Nasdaq-100 will offset losses from the drop in Inverse Nasdaq-100's long position.

The idea behind Basic Materials Fund and Inverse Nasdaq 100 Strategy 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.