Correlation Between Basic Materials and Banco Santander

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

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

Diversification Opportunities for Basic Materials and Banco Santander

-0.58

Correlation Coefficient

Basic Materials  Banco Santander

Excellent diversification

The 3 months correlation between Basic and Banco is -0.58. Overlapping area represents the amount of risk that can be diversified away by holding Basic Materials and Banco Santander SA in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Banco Santander SA 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 Banco Santander. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Banco Santander SA has no effect on the direction of Basic Materials i.e., Basic Materials and Banco Santander go up and down completely randomly.

Pair Corralation between Basic Materials and Banco Santander

Assuming the 90 days trading horizon Basic Materials is expected to generate 0.88 times more return on investment than Banco Santander. However, Basic Materials is 1.13 times less risky than Banco Santander. It trades about 0.11 of its potential returns per unit of risk. Banco Santander SA is currently generating about -0.24 per unit of risk. If you would invest  544,614  in Basic Materials on September 3, 2024 and sell it today you would earn a total of  44,451  from holding Basic Materials or generate 8.16% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Very Weak
Accuracy	98.44%
Values	Daily Returns

Basic Materials  vs.  Banco Santander SA

Pair Trading with Basic Materials and Banco Santander

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

The idea behind Basic Materials and Banco Santander SA 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 Portfolio Holdings module to check your current holdings and cash postion to detemine if your portfolio needs rebalancing.