Correlation Between Strengthening Dollar and Basic Materials

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

By analyzing existing cross correlation between Strengthening Dollar 2x and Basic Materials Fund, you can compare the effects of market volatilities on Strengthening Dollar 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 Strengthening Dollar with a short position of Basic Materials. Check out your portfolio center. Please also check ongoing floating volatility patterns of Strengthening Dollar and Basic Materials.

Diversification Opportunities for Strengthening Dollar and Basic Materials

-0.79

Correlation Coefficient

Strengthening Dollar  Basic Materials

Pay attention - limited upside

The 3 months correlation between Strengthening and Basic is -0.79. Overlapping area represents the amount of risk that can be diversified away by holding Strengthening Dollar 2x and Basic Materials Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Basic Materials and Strengthening Dollar 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 Strengthening Dollar 2x 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 Strengthening Dollar i.e., Strengthening Dollar and Basic Materials go up and down completely randomly.

Pair Corralation between Strengthening Dollar and Basic Materials

Assuming the 90 days horizon Strengthening Dollar 2x is expected to generate 0.45 times more return on investment than Basic Materials. However, Strengthening Dollar 2x is 2.24 times less risky than Basic Materials. It trades about 0.26 of its potential returns per unit of risk. Basic Materials Fund is currently generating about -0.17 per unit of risk. If you would invest  6,103  in Strengthening Dollar 2x on October 15, 2024 and sell it today you would earn a total of  863.00  from holding Strengthening Dollar 2x or generate 14.14% return on investment over 90 days.

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

Strengthening Dollar 2x  vs.  Basic Materials Fund

Strengthening Dollar

Risk-Adjusted Performance

20 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Strengthening Dollar 2x are ranked lower than 20 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak fundamental indicators, Strengthening Dollar showed solid returns over the last few months and may actually be approaching a breakup point.

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 forward indicators remain fairly strong which may send shares a bit higher in February 2025. The current disturbance may also be a sign of long term up-swing for the fund investors.

Pair Trading with Strengthening Dollar and Basic Materials

The main advantage of trading using opposite Strengthening Dollar and Basic Materials positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Strengthening Dollar 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 Strengthening Dollar 2x 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 Portfolio Suggestion module to get suggestions outside of your existing asset allocation including your own model portfolios.