Correlation Between Transportation Fund and Biotechnology Fund

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

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

Diversification Opportunities for Transportation Fund and Biotechnology Fund

-0.36

Correlation Coefficient

Transportation Fund  Biotechnology Fund

Very good diversification

The 3 months correlation between Transportation and Biotechnology is -0.36. Overlapping area represents the amount of risk that can be diversified away by holding Transportation Fund Class and Biotechnology Fund Class in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Biotechnology Fund Class and Transportation 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 Transportation Fund Class are associated (or correlated) with Biotechnology Fund. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Biotechnology Fund Class has no effect on the direction of Transportation Fund i.e., Transportation Fund and Biotechnology Fund go up and down completely randomly.

Pair Corralation between Transportation Fund and Biotechnology Fund

Assuming the 90 days horizon Transportation Fund Class is expected to generate 0.38 times more return on investment than Biotechnology Fund. However, Transportation Fund Class is 2.66 times less risky than Biotechnology Fund. It trades about 0.13 of its potential returns per unit of risk. Biotechnology Fund Class is currently generating about 0.0 per unit of risk. If you would invest  4,166  in Transportation Fund Class on September 18, 2024 and sell it today you would earn a total of  429.00  from holding Transportation Fund Class or generate 10.3% return on investment over 90 days.

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

Transportation Fund Class  vs.  Biotechnology Fund Class

Transportation Fund Class

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Transportation Fund Class are ranked lower than 10 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Transportation Fund may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Biotechnology Fund Class

Risk-Adjusted Performance

0 of 100

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 fairly strong basic indicators, Biotechnology Fund is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Transportation Fund and Biotechnology Fund

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

The idea behind Transportation Fund Class and Biotechnology 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 Correlation Analysis module to reduce portfolio risk simply by holding instruments which are not perfectly correlated.