Correlation Between Rising Rates and Basic Materials

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

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

Diversification Opportunities for Rising Rates and Basic Materials

-0.33

Correlation Coefficient

Rising Rates  Basic Materials

Very good diversification

The 3 months correlation between Rising and Basic is -0.33. Overlapping area represents the amount of risk that can be diversified away by holding Rising Rates Opportunity 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 Rising Rates 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 Rising Rates Opportunity 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 Rising Rates i.e., Rising Rates and Basic Materials go up and down completely randomly.

Pair Corralation between Rising Rates and Basic Materials

Assuming the 90 days horizon Rising Rates Opportunity is expected to under-perform the Basic Materials. But the mutual fund apears to be less risky and, when comparing its historical volatility, Rising Rates Opportunity is 1.09 times less risky than Basic Materials. The mutual fund trades about -0.02 of its potential returns per unit of risk. The Basic Materials Ultrasector is currently generating about 0.07 of returns per unit of risk over similar time horizon. If you would invest  8,737  in Basic Materials Ultrasector on September 17, 2024 and sell it today you would earn a total of  2,336  from holding Basic Materials Ultrasector or generate 26.74% return on investment over 90 days.

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

Rising Rates Opportunity  vs.  Basic Materials Ultrasector

Rising Rates Opportunity

Risk-Adjusted Performance

16 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Rising Rates Opportunity are ranked lower than 16 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Rising Rates showed solid returns over the last few months and may actually be approaching a breakup point.

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 Rising Rates and Basic Materials

The main advantage of trading using opposite Rising Rates and Basic Materials positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Rising Rates 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 Rising Rates Opportunity 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 Pattern Recognition module to use different Pattern Recognition models to time the market across multiple global exchanges.