Correlation Between Basic Materials and Government Long

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

Diversification Opportunities for Basic Materials and Government Long

0.58

Correlation Coefficient

Basic Materials  Government Long

Very weak diversification

The 3 months correlation between Basic and Government is 0.58. Overlapping area represents the amount of risk that can be diversified away by holding Basic Materials Fund and Government Long Bond in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Government Long Bond 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 Government Long. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Government Long Bond has no effect on the direction of Basic Materials i.e., Basic Materials and Government Long go up and down completely randomly.

Pair Corralation between Basic Materials and Government Long

Assuming the 90 days horizon Basic Materials Fund is expected to under-perform the Government Long. In addition to that, Basic Materials is 2.79 times more volatile than Government Long Bond. It trades about -0.1 of its total potential returns per unit of risk. Government Long Bond is currently generating about -0.18 per unit of volatility. If you would invest  2,357  in Government Long Bond on September 28, 2024 and sell it today you would lose (285.00) from holding Government Long Bond or give up 12.09% of portfolio value over 90 days.

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

Basic Materials Fund  vs.  Government Long Bond

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 primary 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.

Government Long Bond

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Government Long Bond has generated negative risk-adjusted returns adding no value to fund investors. In spite of latest weak performance, the Fund's fundamental drivers 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 Government Long

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

The idea behind Basic Materials Fund and Government Long Bond 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 Cryptocurrency Center module to build and monitor diversified portfolio of extremely risky digital assets and cryptocurrency.