Correlation Between Basic Materials and Sp Smallcap

Can any of the company-specific risk be diversified away by investing in both Basic Materials and Sp Smallcap 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 Sp Smallcap 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 Sp Smallcap 600, you can compare the effects of market volatilities on Basic Materials and Sp Smallcap 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 Sp Smallcap. Check out your portfolio center. Please also check ongoing floating volatility patterns of Basic Materials and Sp Smallcap.

Diversification Opportunities for Basic Materials and Sp Smallcap

-0.05

Correlation Coefficient

Basic Materials  Sp Smallcap

Good diversification

The 3 months correlation between Basic and RYAZX is -0.05. Overlapping area represents the amount of risk that can be diversified away by holding Basic Materials Fund and Sp Smallcap 600 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Sp Smallcap 600 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 Sp Smallcap. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Sp Smallcap 600 has no effect on the direction of Basic Materials i.e., Basic Materials and Sp Smallcap go up and down completely randomly.

Pair Corralation between Basic Materials and Sp Smallcap

Assuming the 90 days horizon Basic Materials Fund is expected to under-perform the Sp Smallcap. In addition to that, Basic Materials is 1.3 times more volatile than Sp Smallcap 600. It trades about -0.1 of its total potential returns per unit of risk. Sp Smallcap 600 is currently generating about 0.11 per unit of volatility. If you would invest  19,866  in Sp Smallcap 600 on September 15, 2024 and sell it today you would earn a total of  1,867  from holding Sp Smallcap 600 or generate 9.4% return on investment over 90 days.

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

Basic Materials Fund  vs.  Sp Smallcap 600

Basic Materials

Risk-Adjusted Performance

0 of 100

Weak

Over the last 90 days Basic Materials Fund 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.

Sp Smallcap 600

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Sp Smallcap 600 are ranked lower than 8 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Sp Smallcap may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Basic Materials and Sp Smallcap

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

The idea behind Basic Materials Fund and Sp Smallcap 600 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 Share Portfolio module to track or share privately all of your investments from the convenience of any device.