Correlation Between Energy Fund and Basic Materials

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

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

Diversification Opportunities for Energy Fund and Basic Materials

0.73

Correlation Coefficient

Energy Fund  Basic Materials

Poor diversification

The 3 months correlation between Energy and Basic is 0.73. Overlapping area represents the amount of risk that can be diversified away by holding Energy Fund Class and Basic Materials Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Basic Materials and Energy 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 Energy Fund Class are associated (or correlated) with Basic Materials. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Basic Materials has no effect on the direction of Energy Fund i.e., Energy Fund and Basic Materials go up and down completely randomly.

Pair Corralation between Energy Fund and Basic Materials

Assuming the 90 days horizon Energy Fund Class is expected to generate 0.3 times more return on investment than Basic Materials. However, Energy Fund Class is 3.29 times less risky than Basic Materials. It trades about -0.4 of its potential returns per unit of risk. Basic Materials Fund is currently generating about -0.16 per unit of risk. If you would invest  21,122  in Energy Fund Class on September 27, 2024 and sell it today you would lose (2,743) from holding Energy Fund Class or give up 12.99% of portfolio value over 90 days.

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

Energy Fund Class  vs.  Basic Materials Fund

Energy Fund Class

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Energy Fund Class has generated negative risk-adjusted returns adding no value to fund investors. In spite of latest weak performance, the Fund's fundamental indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the fund investors.

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 basic 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.

Pair Trading with Energy Fund and Basic Materials

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

The idea behind Energy Fund Class and Basic Materials 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 Transaction History module to view history of all your transactions and understand their impact on performance.