Correlation Between Basic Materials and Inverse Russell

Can any of the company-specific risk be diversified away by investing in both Basic Materials and Inverse Russell 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 Russell 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 Russell 2000, you can compare the effects of market volatilities on Basic Materials and Inverse Russell 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 Russell. Check out your portfolio center. Please also check ongoing floating volatility patterns of Basic Materials and Inverse Russell.

Diversification Opportunities for Basic Materials and Inverse Russell

0.45

Correlation Coefficient

Basic Materials  Inverse Russell

Very weak diversification

The 3 months correlation between Basic and Inverse is 0.45. Overlapping area represents the amount of risk that can be diversified away by holding Basic Materials Fund and Inverse Russell 2000 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Inverse Russell 2000 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 Russell. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Inverse Russell 2000 has no effect on the direction of Basic Materials i.e., Basic Materials and Inverse Russell go up and down completely randomly.

Pair Corralation between Basic Materials and Inverse Russell

Assuming the 90 days horizon Basic Materials Fund is expected to under-perform the Inverse Russell. In addition to that, Basic Materials is 2.04 times more volatile than Inverse Russell 2000. It trades about -0.1 of its total potential returns per unit of risk. Inverse Russell 2000 is currently generating about -0.09 per unit of volatility. If you would invest  4,111  in Inverse Russell 2000 on October 1, 2024 and sell it today you would lose (347.00) from holding Inverse Russell 2000 or give up 8.44% of portfolio value over 90 days.

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

Basic Materials Fund  vs.  Inverse Russell 2000

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 primary 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.

Inverse Russell 2000

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Inverse Russell 2000 has generated negative risk-adjusted returns adding no value to fund investors. In spite of latest weak performance, the Fund's basic 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 Inverse Russell

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

The idea behind Basic Materials Fund and Inverse Russell 2000 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.

Check out your portfolio center.

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 FinTech Suite module to use AI to screen and filter profitable investment opportunities.