Correlation Between Basic Materials and Smallcap World

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

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

Diversification Opportunities for Basic Materials and Smallcap World

0.66

Correlation Coefficient

Basic Materials  Smallcap World

Poor diversification

The 3 months correlation between Basic and Smallcap is 0.66. Overlapping area represents the amount of risk that can be diversified away by holding Basic Materials Ultrasector and Smallcap World Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Smallcap World and Basic Materials 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 Basic Materials Ultrasector are associated (or correlated) with Smallcap World. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Smallcap World has no effect on the direction of Basic Materials i.e., Basic Materials and Smallcap World go up and down completely randomly.

Pair Corralation between Basic Materials and Smallcap World

Assuming the 90 days horizon Basic Materials is expected to generate 1.62 times less return on investment than Smallcap World. In addition to that, Basic Materials is 1.89 times more volatile than Smallcap World Fund. It trades about 0.05 of its total potential returns per unit of risk. Smallcap World Fund is currently generating about 0.15 per unit of volatility. If you would invest  6,939  in Smallcap World Fund on May 19, 2025 and sell it today you would earn a total of  521.00  from holding Smallcap World Fund or generate 7.51% return on investment over 90 days.

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

Basic Materials Ultrasector  vs.  Smallcap World Fund

Basic Materials Ultr

Risk-Adjusted Performance

Soft

Compared to the overall equity markets, risk-adjusted returns on investments in Basic Materials Ultrasector are ranked lower than 3 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong forward indicators, Basic Materials is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Smallcap World

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Smallcap World Fund are ranked lower than 12 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak technical and fundamental indicators, Smallcap World may actually be approaching a critical reversion point that can send shares even higher in September 2025.

Pair Trading with Basic Materials and Smallcap World

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

The idea behind Basic Materials Ultrasector and Smallcap World 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.

Check out your portfolio center.

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 Risk-Return Analysis module to view associations between returns expected from investment and the risk you assume.