Correlation Between Precious Metals and Energy Fund

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

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

Diversification Opportunities for Precious Metals and Energy Fund

-0.25

Correlation Coefficient

Precious Metals  Energy Fund

Very good diversification

The 3 months correlation between Precious and Energy is -0.25. Overlapping area represents the amount of risk that can be diversified away by holding Precious Metals Fund and Energy Fund Class in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Energy Fund Class and Precious Metals 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 Precious Metals Fund are associated (or correlated) with Energy Fund. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Energy Fund Class has no effect on the direction of Precious Metals i.e., Precious Metals and Energy Fund go up and down completely randomly.

Pair Corralation between Precious Metals and Energy Fund

Assuming the 90 days horizon Precious Metals Fund is expected to generate 1.48 times more return on investment than Energy Fund. However, Precious Metals is 1.48 times more volatile than Energy Fund Class. It trades about 0.23 of its potential returns per unit of risk. Energy Fund Class is currently generating about 0.04 per unit of risk. If you would invest  11,178  in Precious Metals Fund on December 29, 2024 and sell it today you would earn a total of  3,331  from holding Precious Metals Fund or generate 29.8% return on investment over 90 days.

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

Precious Metals Fund  vs.  Energy Fund Class

Precious Metals

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Precious Metals Fund are ranked lower than 18 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak primary indicators, Precious Metals showed solid returns over the last few months and may actually be approaching a breakup point.

Energy Fund Class

Risk-Adjusted Performance

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Energy Fund Class are ranked lower than 3 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Energy 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 Precious Metals and Energy Fund

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

The idea behind Precious Metals Fund and Energy 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 Equity Valuation module to check real value of public entities based on technical and fundamental data.