Correlation Between IShares Basic and SPDR SP

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

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

Diversification Opportunities for IShares Basic and SPDR SP

0.23

Correlation Coefficient

IShares Basic  SPDR SP

Modest diversification

The 3 months correlation between IShares and SPDR is 0.23. Overlapping area represents the amount of risk that can be diversified away by holding iShares Basic Materials and SPDR SP Oil in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on SPDR SP Oil and IShares Basic 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 iShares Basic Materials are associated (or correlated) with SPDR SP. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of SPDR SP Oil has no effect on the direction of IShares Basic i.e., IShares Basic and SPDR SP go up and down completely randomly.

Pair Corralation between IShares Basic and SPDR SP

Considering the 90-day investment horizon iShares Basic Materials is expected to generate 0.62 times more return on investment than SPDR SP. However, iShares Basic Materials is 1.62 times less risky than SPDR SP. It trades about 0.04 of its potential returns per unit of risk. SPDR SP Oil is currently generating about 0.02 per unit of risk. If you would invest  12,214  in iShares Basic Materials on September 5, 2024 and sell it today you would earn a total of  2,507  from holding iShares Basic Materials or generate 20.53% return on investment over 90 days.

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

iShares Basic Materials  vs.  SPDR SP Oil

iShares Basic Materials

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in iShares Basic Materials are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy basic indicators, IShares Basic is not utilizing all of its potentials. The new stock price disarray, may contribute to short-term losses for the investors.

SPDR SP Oil

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in SPDR SP Oil are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. Even with relatively unfluctuating basic indicators, SPDR SP may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with IShares Basic and SPDR SP

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

The idea behind iShares Basic Materials and SPDR SP Oil 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.

Check out your portfolio center.

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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.