Correlation Between Basic Materials and Target Retirement

Can any of the company-specific risk be diversified away by investing in both Basic Materials and Target Retirement 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 Target Retirement 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 Target Retirement 2040, you can compare the effects of market volatilities on Basic Materials and Target Retirement 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 Target Retirement. Check out your portfolio center. Please also check ongoing floating volatility patterns of Basic Materials and Target Retirement.

Diversification Opportunities for Basic Materials and Target Retirement

0.49

Correlation Coefficient

Basic Materials  Target Retirement

Very weak diversification

The 3 months correlation between Basic and Target is 0.49. Overlapping area represents the amount of risk that can be diversified away by holding Basic Materials Ultrasector and Target Retirement 2040 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Target Retirement 2040 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 Target Retirement. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Target Retirement 2040 has no effect on the direction of Basic Materials i.e., Basic Materials and Target Retirement go up and down completely randomly.

Pair Corralation between Basic Materials and Target Retirement

Assuming the 90 days horizon Basic Materials Ultrasector is expected to generate 2.99 times more return on investment than Target Retirement. However, Basic Materials is 2.99 times more volatile than Target Retirement 2040. It trades about 0.18 of its potential returns per unit of risk. Target Retirement 2040 is currently generating about 0.3 per unit of risk. If you would invest  9,863  in Basic Materials Ultrasector on April 29, 2025 and sell it today you would earn a total of  1,538  from holding Basic Materials Ultrasector or generate 15.59% return on investment over 90 days.

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

Basic Materials Ultrasector  vs.  Target Retirement 2040

Basic Materials Ultr

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Basic Materials Ultrasector are ranked lower than 13 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak forward indicators, Basic Materials showed solid returns over the last few months and may actually be approaching a breakup point.

Target Retirement 2040

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Target Retirement 2040 are ranked lower than 23 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Target Retirement may actually be approaching a critical reversion point that can send shares even higher in August 2025.

Pair Trading with Basic Materials and Target Retirement

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

The idea behind Basic Materials Ultrasector and Target Retirement 2040 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 Money Flow Index module to determine momentum by analyzing Money Flow Index and other technical indicators.