Correlation Between Moderate Balanced and Energy Basic

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

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

Diversification Opportunities for Moderate Balanced and Energy Basic

0.51

Correlation Coefficient

Moderate Balanced  Energy Basic

Very weak diversification

The 3 months correlation between Moderate and Energy is 0.51. Overlapping area represents the amount of risk that can be diversified away by holding Moderate Balanced Allocation and Energy Basic Materials in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Energy Basic Materials and Moderate Balanced 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 Moderate Balanced Allocation are associated (or correlated) with Energy Basic. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Energy Basic Materials has no effect on the direction of Moderate Balanced i.e., Moderate Balanced and Energy Basic go up and down completely randomly.

Pair Corralation between Moderate Balanced and Energy Basic

Assuming the 90 days horizon Moderate Balanced Allocation is expected to under-perform the Energy Basic. But the mutual fund apears to be less risky and, when comparing its historical volatility, Moderate Balanced Allocation is 1.41 times less risky than Energy Basic. The mutual fund trades about -0.06 of its potential returns per unit of risk. The Energy Basic Materials is currently generating about 0.13 of returns per unit of risk over similar time horizon. If you would invest  926.00  in Energy Basic Materials on December 21, 2024 and sell it today you would earn a total of  65.00  from holding Energy Basic Materials or generate 7.02% return on investment over 90 days.

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

Moderate Balanced Allocation  vs.  Energy Basic Materials

Moderate Balanced

Risk-Adjusted Performance

Very Weak

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

Energy Basic Materials

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Energy Basic Materials are ranked lower than 10 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak fundamental indicators, Energy Basic may actually be approaching a critical reversion point that can send shares even higher in April 2025.

Pair Trading with Moderate Balanced and Energy Basic

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

The idea behind Moderate Balanced Allocation and Energy Basic Materials 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 Pair Correlation module to compare performance and examine fundamental relationship between any two equity instruments.