Correlation Between Nasdaq-100(r) and Basic Materials

Can any of the company-specific risk be diversified away by investing in both Nasdaq-100(r) 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 Nasdaq-100(r) and Basic Materials into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Nasdaq 100 2x Strategy and Basic Materials Fund, you can compare the effects of market volatilities on Nasdaq-100(r) 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 Nasdaq-100(r) with a short position of Basic Materials. Check out your portfolio center. Please also check ongoing floating volatility patterns of Nasdaq-100(r) and Basic Materials.

Diversification Opportunities for Nasdaq-100(r) and Basic Materials

0.83

Correlation Coefficient

Nasdaq-100(r)  Basic Materials

Very poor diversification

The 3 months correlation between Nasdaq-100(r) and Basic is 0.83. Overlapping area represents the amount of risk that can be diversified away by holding Nasdaq 100 2x Strategy and Basic Materials Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Basic Materials and Nasdaq-100(r) 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 Nasdaq 100 2x Strategy 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 Nasdaq-100(r) i.e., Nasdaq-100(r) and Basic Materials go up and down completely randomly.

Pair Corralation between Nasdaq-100(r) and Basic Materials

Assuming the 90 days horizon Nasdaq 100 2x Strategy is expected to generate 2.21 times more return on investment than Basic Materials. However, Nasdaq-100(r) is 2.21 times more volatile than Basic Materials Fund. It trades about 0.1 of its potential returns per unit of risk. Basic Materials Fund is currently generating about 0.07 per unit of risk. If you would invest  37,228  in Nasdaq 100 2x Strategy on August 15, 2024 and sell it today you would earn a total of  5,235  from holding Nasdaq 100 2x Strategy or generate 14.06% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	98.44%
Values	Daily Returns

Nasdaq 100 2x Strategy  vs.  Basic Materials Fund

Nasdaq 100 2x

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Nasdaq 100 2x Strategy are ranked lower than 8 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak fundamental indicators, Nasdaq-100(r) showed solid returns over the last few months and may actually be approaching a breakup point.

Basic Materials

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Basic Materials Fund are ranked lower than 5 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong fundamental 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 Nasdaq-100(r) and Basic Materials

The main advantage of trading using opposite Nasdaq-100(r) and Basic Materials positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Nasdaq-100(r) 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 Nasdaq 100 2x Strategy 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 Stock Screener module to find equities using a custom stock filter or screen asymmetry in trading patterns, price, volume, or investment outlook..