Correlation Between Basic Materials and K1SS34

Can any of the company-specific risk be diversified away by investing in both Basic Materials and K1SS34 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 K1SS34 into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Basic Materials and K1SS34, you can compare the effects of market volatilities on Basic Materials and K1SS34 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 K1SS34. Check out your portfolio center. Please also check ongoing floating volatility patterns of Basic Materials and K1SS34.

Diversification Opportunities for Basic Materials and K1SS34

-0.29

Correlation Coefficient

Basic Materials  K1SS34

Very good diversification

The 3 months correlation between Basic and K1SS34 is -0.29. Overlapping area represents the amount of risk that can be diversified away by holding Basic Materials and K1SS34 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on K1SS34 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 are associated (or correlated) with K1SS34. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of K1SS34 has no effect on the direction of Basic Materials i.e., Basic Materials and K1SS34 go up and down completely randomly.

Pair Corralation between Basic Materials and K1SS34

Assuming the 90 days trading horizon Basic Materials is expected to generate 0.31 times more return on investment than K1SS34. However, Basic Materials is 3.27 times less risky than K1SS34. It trades about -0.12 of its potential returns per unit of risk. K1SS34 is currently generating about -0.18 per unit of risk. If you would invest  578,102  in Basic Materials on September 25, 2024 and sell it today you would lose (21,008) from holding Basic Materials or give up 3.63% of portfolio value over 90 days.

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

Basic Materials  vs.  K1SS34

Pair Trading with Basic Materials and K1SS34

The main advantage of trading using opposite Basic Materials and K1SS34 positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Basic Materials position performs unexpectedly, K1SS34 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 K1SS34 will offset losses from the drop in K1SS34's long position.

The idea behind Basic Materials and K1SS34 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 FinTech Suite module to use AI to screen and filter profitable investment opportunities.