Correlation Between Target Retirement and Basic Materials

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

By analyzing existing cross correlation between Target Retirement 2040 and Basic Materials Ultrasector, you can compare the effects of market volatilities on Target Retirement 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 Target Retirement with a short position of Basic Materials. Check out your portfolio center. Please also check ongoing floating volatility patterns of Target Retirement and Basic Materials.

Diversification Opportunities for Target Retirement and Basic Materials

0.88

Correlation Coefficient

Target Retirement  Basic Materials

Very poor diversification

The 3 months correlation between Target and Basic is 0.88. Overlapping area represents the amount of risk that can be diversified away by holding Target Retirement 2040 and Basic Materials Ultrasector in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Basic Materials Ultr and Target Retirement 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 Target Retirement 2040 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 Ultr has no effect on the direction of Target Retirement i.e., Target Retirement and Basic Materials go up and down completely randomly.

Pair Corralation between Target Retirement and Basic Materials

Assuming the 90 days horizon Target Retirement is expected to generate 1.1 times less return on investment than Basic Materials. But when comparing it to its historical volatility, Target Retirement 2040 is 3.04 times less risky than Basic Materials. It trades about 0.22 of its potential returns per unit of risk. Basic Materials Ultrasector is currently generating about 0.08 of returns per unit of risk over similar time horizon. If you would invest  10,000  in Basic Materials Ultrasector on May 8, 2025 and sell it today you would earn a total of  677.00  from holding Basic Materials Ultrasector or generate 6.77% return on investment over 90 days.

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

Target Retirement 2040  vs.  Basic Materials Ultrasector

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 17 (%) 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 September 2025.

Basic Materials Ultr

Risk-Adjusted Performance

Mild

Compared to the overall equity markets, risk-adjusted returns on investments in Basic Materials Ultrasector are ranked lower than 6 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak forward indicators, Basic Materials may actually be approaching a critical reversion point that can send shares even higher in September 2025.

Pair Trading with Target Retirement and Basic Materials

The main advantage of trading using opposite Target Retirement and Basic Materials positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Target Retirement 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 Target Retirement 2040 and Basic Materials Ultrasector 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 Alpha Finder module to use alpha and beta coefficients to find investment opportunities after accounting for the risk.