Correlation Between Government Long and Basic Materials

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

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

Diversification Opportunities for Government Long and Basic Materials

0.02

Correlation Coefficient

Government Long  Basic Materials

Significant diversification

The 3 months correlation between Government and Basic is 0.02. Overlapping area represents the amount of risk that can be diversified away by holding Government Long Bond and Basic Materials Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Basic Materials and Government Long 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 Government Long Bond are associated (or correlated) with Basic Materials. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Basic Materials has no effect on the direction of Government Long i.e., Government Long and Basic Materials go up and down completely randomly.

Pair Corralation between Government Long and Basic Materials

Assuming the 90 days horizon Government Long Bond is expected to under-perform the Basic Materials. But the mutual fund apears to be less risky and, when comparing its historical volatility, Government Long Bond is 2.02 times less risky than Basic Materials. The mutual fund trades about -0.04 of its potential returns per unit of risk. The Basic Materials Fund is currently generating about 0.29 of returns per unit of risk over similar time horizon. If you would invest  5,930  in Basic Materials Fund on February 7, 2025 and sell it today you would earn a total of  883.00  from holding Basic Materials Fund or generate 14.89% return on investment over 90 days.

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

Government Long Bond  vs.  Basic Materials Fund

Government Long Bond

Risk-Adjusted Performance

Very Weak

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

Basic Materials

Risk-Adjusted Performance

Very Weak

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

Pair Trading with Government Long and Basic Materials

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

The idea behind Government Long Bond and Basic Materials 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 Price Exposure Probability module to analyze equity upside and downside potential for a given time horizon across multiple markets.