Correlation Between Basic Materials and Electronics Fund

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

Diversification Opportunities for Basic Materials and Electronics Fund

0.8

Correlation Coefficient

Basic Materials  Electronics Fund

Very poor diversification

The 3 months correlation between Basic and Electronics is 0.8. Overlapping area represents the amount of risk that can be diversified away by holding Basic Materials Fund and Electronics Fund Investor in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Electronics Fund Investor 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 Electronics Fund. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Electronics Fund Investor has no effect on the direction of Basic Materials i.e., Basic Materials and Electronics Fund go up and down completely randomly.

Pair Corralation between Basic Materials and Electronics Fund

Assuming the 90 days horizon Basic Materials Fund is expected to generate 0.48 times more return on investment than Electronics Fund. However, Basic Materials Fund is 2.08 times less risky than Electronics Fund. It trades about 0.13 of its potential returns per unit of risk. Electronics Fund Investor is currently generating about 0.06 per unit of risk. If you would invest  8,401  in Basic Materials Fund on September 4, 2024 and sell it today you would earn a total of  648.00  from holding Basic Materials Fund or generate 7.71% return on investment over 90 days.

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

Basic Materials Fund  vs.  Electronics Fund Investor

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 forward indicators, Basic Materials may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Electronics Fund Investor

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Electronics Fund Investor are ranked lower than 4 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak forward indicators, Electronics Fund may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Basic Materials and Electronics Fund

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

The idea behind Basic Materials Fund and Electronics Fund Investor 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 Price Transformation module to use Price Transformation models to analyze the depth of different equity instruments across global markets.