Correlation Between Basic Materials and Sp 500

Can any of the company-specific risk be diversified away by investing in both Basic Materials and Sp 500 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 500 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 500 Fund, you can compare the effects of market volatilities on Basic Materials and Sp 500 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 500. Check out your portfolio center. Please also check ongoing floating volatility patterns of Basic Materials and Sp 500.

Diversification Opportunities for Basic Materials and Sp 500

0.7

Correlation Coefficient

Basic Materials  Sp 500

Poor diversification

The 3 months correlation between Basic and RYSOX is 0.7. Overlapping area represents the amount of risk that can be diversified away by holding Basic Materials Fund and Sp 500 Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Sp 500 Fund 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 500. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Sp 500 Fund has no effect on the direction of Basic Materials i.e., Basic Materials and Sp 500 go up and down completely randomly.

Pair Corralation between Basic Materials and Sp 500

Assuming the 90 days horizon Basic Materials is expected to generate 1.21 times less return on investment than Sp 500. In addition to that, Basic Materials is 1.25 times more volatile than Sp 500 Fund. It trades about 0.13 of its total potential returns per unit of risk. Sp 500 Fund is currently generating about 0.2 per unit of volatility. If you would invest  8,463  in Sp 500 Fund on September 4, 2024 and sell it today you would earn a total of  801.00  from holding Sp 500 Fund or generate 9.46% return on investment over 90 days.

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

Basic Materials Fund  vs.  Sp 500 Fund

Basic Materials

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Basic Materials Fund are ranked lower than 10 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Basic Materials may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Sp 500 Fund

Risk-Adjusted Performance

15 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Sp 500 Fund are ranked lower than 15 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Sp 500 may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Basic Materials and Sp 500

The main advantage of trading using opposite Basic Materials and Sp 500 positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Basic Materials position performs unexpectedly, Sp 500 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 500 will offset losses from the drop in Sp 500's long position.

The idea behind Basic Materials Fund and Sp 500 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.

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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 CEOs Directory module to screen CEOs from public companies around the world.