Correlation Between Basic Materials and Precious Metals

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

Diversification Opportunities for Basic Materials and Precious Metals

0.41

Correlation Coefficient

Basic Materials  Precious Metals

Very weak diversification

The 3 months correlation between Basic and Precious is 0.41. Overlapping area represents the amount of risk that can be diversified away by holding Basic Materials Fund and Precious Metals Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Precious Metals 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 Precious Metals. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Precious Metals has no effect on the direction of Basic Materials i.e., Basic Materials and Precious Metals go up and down completely randomly.

Pair Corralation between Basic Materials and Precious Metals

Assuming the 90 days horizon Basic Materials Fund is expected to under-perform the Precious Metals. But the mutual fund apears to be less risky and, when comparing its historical volatility, Basic Materials Fund is 1.18 times less risky than Precious Metals. The mutual fund trades about -0.1 of its potential returns per unit of risk. The Precious Metals Fund is currently generating about -0.05 of returns per unit of risk over similar time horizon. If you would invest  4,363  in Precious Metals Fund on September 15, 2024 and sell it today you would lose (305.00) from holding Precious Metals Fund or give up 6.99% 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.  Precious Metals 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 primary indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the fund investors.

Precious Metals

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Precious Metals Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong primary indicators, Precious Metals 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 Precious Metals

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

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