Correlation Between Energy Basic and Royce Dividend

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

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

Diversification Opportunities for Energy Basic and Royce Dividend

0.71

Correlation Coefficient

Energy Basic  Royce Dividend

Poor diversification

The 3 months correlation between Energy and Royce is 0.71. Overlapping area represents the amount of risk that can be diversified away by holding Energy Basic Materials and Royce Dividend Value in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Royce Dividend Value and Energy Basic 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 Basic Materials are associated (or correlated) with Royce Dividend. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Royce Dividend Value has no effect on the direction of Energy Basic i.e., Energy Basic and Royce Dividend go up and down completely randomly.

Pair Corralation between Energy Basic and Royce Dividend

Assuming the 90 days horizon Energy Basic Materials is expected to generate 0.42 times more return on investment than Royce Dividend. However, Energy Basic Materials is 2.37 times less risky than Royce Dividend. It trades about -0.1 of its potential returns per unit of risk. Royce Dividend Value is currently generating about -0.16 per unit of risk. If you would invest  1,260  in Energy Basic Materials on December 3, 2024 and sell it today you would lose (68.00) from holding Energy Basic Materials or give up 5.4% of portfolio value over 90 days.

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

Energy Basic Materials  vs.  Royce Dividend Value

Energy Basic Materials

Risk-Adjusted Performance

Very Weak

Over the last 90 days Energy Basic Materials has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong fundamental drivers, Energy Basic is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Royce Dividend Value

Risk-Adjusted Performance

Very Weak

Over the last 90 days Royce Dividend Value 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 April 2025. The current disturbance may also be a sign of long term up-swing for the fund investors.

Pair Trading with Energy Basic and Royce Dividend

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

The idea behind Energy Basic Materials and Royce Dividend Value 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 AI Portfolio Architect module to use AI to generate optimal portfolios and find profitable investment opportunities.