Correlation Between Basic Materials and Inverse Nasdaq

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

By analyzing existing cross correlation between Basic Materials Fund and Inverse Nasdaq 100 Strategy, you can compare the effects of market volatilities on Basic Materials and Inverse Nasdaq 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 Inverse Nasdaq. Check out your portfolio center. Please also check ongoing floating volatility patterns of Basic Materials and Inverse Nasdaq.

Diversification Opportunities for Basic Materials and Inverse Nasdaq

0.66

Correlation Coefficient

Basic Materials  Inverse Nasdaq

Poor diversification

The 3 months correlation between Basic and Inverse is 0.66. Overlapping area represents the amount of risk that can be diversified away by holding Basic Materials Fund and Inverse Nasdaq 100 Strategy in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Inverse Nasdaq 100 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 Fund are associated (or correlated) with Inverse Nasdaq. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Inverse Nasdaq 100 has no effect on the direction of Basic Materials i.e., Basic Materials and Inverse Nasdaq go up and down completely randomly.

Pair Corralation between Basic Materials and Inverse Nasdaq

Assuming the 90 days horizon Basic Materials Fund is expected to under-perform the Inverse Nasdaq. In addition to that, Basic Materials is 2.53 times more volatile than Inverse Nasdaq 100 Strategy. It trades about -0.09 of its total potential returns per unit of risk. Inverse Nasdaq 100 Strategy is currently generating about -0.14 per unit of volatility. If you would invest  1,515  in Inverse Nasdaq 100 Strategy on September 21, 2024 and sell it today you would lose (165.00) from holding Inverse Nasdaq 100 Strategy or give up 10.89% of portfolio value over 90 days.

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

Basic Materials Fund  vs.  Inverse Nasdaq 100 Strategy

Basic Materials

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Basic Materials Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of weak performance in the last few months, the Fund's basic indicators remain fairly strong which may send shares a bit higher in January 2025. The current disturbance may also be a sign of long term up-swing for the fund investors.

Inverse Nasdaq 100

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Inverse Nasdaq 100 Strategy has generated negative risk-adjusted returns adding no value to fund investors. In spite of latest weak performance, the Fund's basic 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 Basic Materials and Inverse Nasdaq

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

The idea behind Basic Materials Fund and Inverse Nasdaq 100 Strategy 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 Alpha Finder module to use alpha and beta coefficients to find investment opportunities after accounting for the risk.