Correlation Between Energy Basic and New Perspective

Can any of the company-specific risk be diversified away by investing in both Energy Basic and New Perspective 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 New Perspective 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 New Perspective Fund, you can compare the effects of market volatilities on Energy Basic and New Perspective 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 New Perspective. Check out your portfolio center. Please also check ongoing floating volatility patterns of Energy Basic and New Perspective.

Diversification Opportunities for Energy Basic and New Perspective

0.52

Correlation Coefficient

Energy Basic  New Perspective

Very weak diversification

The 3 months correlation between Energy and New is 0.52. Overlapping area represents the amount of risk that can be diversified away by holding Energy Basic Materials and New Perspective Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on New Perspective 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 New Perspective. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of New Perspective has no effect on the direction of Energy Basic i.e., Energy Basic and New Perspective go up and down completely randomly.

Pair Corralation between Energy Basic and New Perspective

Assuming the 90 days horizon Energy Basic Materials is expected to under-perform the New Perspective. But the mutual fund apears to be less risky and, when comparing its historical volatility, Energy Basic Materials is 1.15 times less risky than New Perspective. The mutual fund trades about -0.09 of its potential returns per unit of risk. The New Perspective Fund is currently generating about -0.05 of returns per unit of risk over similar time horizon. If you would invest  6,624  in New Perspective Fund on December 1, 2024 and sell it today you would lose (209.00) from holding New Perspective Fund or give up 3.16% of portfolio value over 90 days.

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

Energy Basic Materials  vs.  New Perspective Fund

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.

New Perspective

Risk-Adjusted Performance

Very Weak

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

Pair Trading with Energy Basic and New Perspective

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

The idea behind Energy Basic Materials and New Perspective 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 Equity Analysis module to research over 250,000 global equities including funds, stocks and ETFs to find investment opportunities.