Correlation Between Basic Materials and Russell 2000

Can any of the company-specific risk be diversified away by investing in both Basic Materials and Russell 2000 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 Russell 2000 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 Russell 2000 Fund, you can compare the effects of market volatilities on Basic Materials and Russell 2000 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 Russell 2000. Check out your portfolio center. Please also check ongoing floating volatility patterns of Basic Materials and Russell 2000.

Diversification Opportunities for Basic Materials and Russell 2000

0.08

Correlation Coefficient

Basic Materials  Russell 2000

Significant diversification

The 3 months correlation between Basic and Russell is 0.08. Overlapping area represents the amount of risk that can be diversified away by holding Basic Materials Fund and Russell 2000 Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Russell 2000 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 Russell 2000. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Russell 2000 has no effect on the direction of Basic Materials i.e., Basic Materials and Russell 2000 go up and down completely randomly.

Pair Corralation between Basic Materials and Russell 2000

Assuming the 90 days horizon Basic Materials is expected to generate 7.24 times less return on investment than Russell 2000. But when comparing it to its historical volatility, Basic Materials Fund is 1.05 times less risky than Russell 2000. It trades about 0.01 of its potential returns per unit of risk. Russell 2000 Fund is currently generating about 0.05 of returns per unit of risk over similar time horizon. If you would invest  4,256  in Russell 2000 Fund on September 15, 2024 and sell it today you would earn a total of  1,391  from holding Russell 2000 Fund or generate 32.68% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Insignificant
Accuracy	99.8%
Values	Daily Returns

Basic Materials Fund  vs.  Russell 2000 Fund

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 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.

Russell 2000

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Russell 2000 Fund are ranked lower than 6 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong technical indicators, Russell 2000 is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Basic Materials and Russell 2000

The main advantage of trading using opposite Basic Materials and Russell 2000 positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Basic Materials position performs unexpectedly, Russell 2000 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 Russell 2000 will offset losses from the drop in Russell 2000's long position.

The idea behind Basic Materials Fund and Russell 2000 Fund 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 Technical Analysis module to check basic technical indicators and analysis based on most latest market data.