Correlation Between Biotechnology Fund and Telecommunications

Can any of the company-specific risk be diversified away by investing in both Biotechnology Fund and Telecommunications 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 Biotechnology Fund and Telecommunications into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Biotechnology Fund Class and Telecommunications Fund Class, you can compare the effects of market volatilities on Biotechnology Fund and Telecommunications 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 Biotechnology Fund with a short position of Telecommunications. Check out your portfolio center. Please also check ongoing floating volatility patterns of Biotechnology Fund and Telecommunications.

Diversification Opportunities for Biotechnology Fund and Telecommunications

0.53

Correlation Coefficient

Biotechnology Fund  Telecommunications

Very weak diversification

The 3 months correlation between Biotechnology and Telecommunications is 0.53. Overlapping area represents the amount of risk that can be diversified away by holding Biotechnology Fund Class and Telecommunications Fund Class in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Telecommunications and Biotechnology Fund 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 Biotechnology Fund Class are associated (or correlated) with Telecommunications. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Telecommunications has no effect on the direction of Biotechnology Fund i.e., Biotechnology Fund and Telecommunications go up and down completely randomly.

Pair Corralation between Biotechnology Fund and Telecommunications

Assuming the 90 days horizon Biotechnology Fund is expected to generate 5.36 times less return on investment than Telecommunications. In addition to that, Biotechnology Fund is 1.34 times more volatile than Telecommunications Fund Class. It trades about 0.03 of its total potential returns per unit of risk. Telecommunications Fund Class is currently generating about 0.2 per unit of volatility. If you would invest  3,884  in Telecommunications Fund Class on November 28, 2024 and sell it today you would earn a total of  116.00  from holding Telecommunications Fund Class or generate 2.99% return on investment over 90 days.

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

Biotechnology Fund Class  vs.  Telecommunications Fund Class

Biotechnology Fund Class

Risk-Adjusted Performance

Very Weak

Over the last 90 days Biotechnology Fund Class 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 technical and fundamental 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.

Telecommunications

Risk-Adjusted Performance

Very Weak

Over the last 90 days Telecommunications Fund Class has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, Telecommunications is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Biotechnology Fund and Telecommunications

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

The idea behind Biotechnology Fund Class and Telecommunications Fund Class 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 Commodity Channel module to use Commodity Channel Index to analyze current equity momentum.