Correlation Between Ford and Basic Materials

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

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

Diversification Opportunities for Ford and Basic Materials

0.06

Correlation Coefficient

Ford  Basic Materials

Significant diversification

The 3 months correlation between Ford and Basic is 0.06. Overlapping area represents the amount of risk that can be diversified away by holding Ford Motor 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 Ford 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 Ford Motor 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 Ford i.e., Ford and Basic Materials go up and down completely randomly.

Pair Corralation between Ford and Basic Materials

Taking into account the 90-day investment horizon Ford Motor is expected to generate 1.7 times more return on investment than Basic Materials. However, Ford is 1.7 times more volatile than Basic Materials Ultrasector. It trades about -0.02 of its potential returns per unit of risk. Basic Materials Ultrasector is currently generating about -0.1 per unit of risk. If you would invest  1,075  in Ford Motor on September 17, 2024 and sell it today you would lose (36.00) from holding Ford Motor or give up 3.35% of portfolio value over 90 days.

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

Ford Motor  vs.  Basic Materials Ultrasector

Ford Motor

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Ford Motor has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable technical and fundamental indicators, Ford is not utilizing all of its potentials. The recent stock price disturbance, may contribute to mid-run losses for the stockholders.

Basic Materials Ultr

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Basic Materials Ultrasector has generated negative risk-adjusted returns adding no value to fund investors. In spite of latest weak performance, the Fund's forward indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the fund investors.

Pair Trading with Ford and Basic Materials

The main advantage of trading using opposite Ford and Basic Materials positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Ford 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 Ford Motor 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 AI Portfolio Architect module to use AI to generate optimal portfolios and find profitable investment opportunities.