Correlation Between Basic Materials and Government Long

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

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

Diversification Opportunities for Basic Materials and Government Long

-0.62

Correlation Coefficient

Basic Materials  Government Long

Excellent diversification

The 3 months correlation between Basic and Government is -0.62. Overlapping area represents the amount of risk that can be diversified away by holding Basic Materials Fund and Government Long Bond in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Government Long Bond 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 Fund are associated (or correlated) with Government Long. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Government Long Bond has no effect on the direction of Basic Materials i.e., Basic Materials and Government Long go up and down completely randomly.

Pair Corralation between Basic Materials and Government Long

Assuming the 90 days horizon Basic Materials Fund is expected to generate 1.01 times more return on investment than Government Long. However, Basic Materials is 1.01 times more volatile than Government Long Bond. It trades about 0.15 of its potential returns per unit of risk. Government Long Bond is currently generating about -0.07 per unit of risk. If you would invest  7,265  in Basic Materials Fund on August 12, 2024 and sell it today you would earn a total of  737.00  from holding Basic Materials Fund or generate 10.14% return on investment over 90 days.

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

Basic Materials Fund  vs.  Government Long Bond

Basic Materials

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Basic Materials Fund are ranked lower than 12 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Basic Materials may actually be approaching a critical reversion point that can send shares even higher in December 2024.

Government Long Bond

Risk-Adjusted Performance

0 of 100

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.

Pair Trading with Basic Materials and Government Long

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

The idea behind Basic Materials Fund and Government Long Bond 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 Latest Portfolios module to quick portfolio dashboard that showcases your latest portfolios.