Correlation Between Russell 2000 and Basic Materials

Can any of the company-specific risk be diversified away by investing in both Russell 2000 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 Russell 2000 and Basic Materials into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Russell 2000 15x and Basic Materials Fund, you can compare the effects of market volatilities on Russell 2000 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 Russell 2000 with a short position of Basic Materials. Check out your portfolio center. Please also check ongoing floating volatility patterns of Russell 2000 and Basic Materials.

Diversification Opportunities for Russell 2000 and Basic Materials

0.17

Correlation Coefficient

Russell 2000  Basic Materials

Average diversification

The 3 months correlation between Russell and Basic is 0.17. Overlapping area represents the amount of risk that can be diversified away by holding Russell 2000 15x and Basic Materials Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Basic Materials and Russell 2000 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 Russell 2000 15x 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 Russell 2000 i.e., Russell 2000 and Basic Materials go up and down completely randomly.

Pair Corralation between Russell 2000 and Basic Materials

Assuming the 90 days horizon Russell 2000 15x is expected to under-perform the Basic Materials. In addition to that, Russell 2000 is 1.76 times more volatile than Basic Materials Fund. It trades about -0.11 of its total potential returns per unit of risk. Basic Materials Fund is currently generating about 0.1 per unit of volatility. If you would invest  7,340  in Basic Materials Fund on December 21, 2024 and sell it today you would earn a total of  441.00  from holding Basic Materials Fund or generate 6.01% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Insignificant
Accuracy	98.33%
Values	Daily Returns

Russell 2000 15x  vs.  Basic Materials Fund

Russell 2000 15x

Risk-Adjusted Performance

Very Weak

Over the last 90 days Russell 2000 15x has generated negative risk-adjusted returns adding no value to fund investors. In spite of latest weak performance, the Fund's forward-looking signals 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

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Basic Materials Fund are ranked lower than 7 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak forward indicators, Basic Materials may actually be approaching a critical reversion point that can send shares even higher in April 2025.

Pair Trading with Russell 2000 and Basic Materials

The main advantage of trading using opposite Russell 2000 and Basic Materials positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Russell 2000 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 Russell 2000 15x 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 Volatility Analysis module to get historical volatility and risk analysis based on latest market data.