Correlation Between Energy Basic and Equity Income

Can any of the company-specific risk be diversified away by investing in both Energy Basic and Equity Income 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 Energy Basic and Equity Income into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Energy Basic Materials and Equity Income Fund, you can compare the effects of market volatilities on Energy Basic and Equity Income 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 Energy Basic with a short position of Equity Income. Check out your portfolio center. Please also check ongoing floating volatility patterns of Energy Basic and Equity Income.

Diversification Opportunities for Energy Basic and Equity Income

0.63

Correlation Coefficient

Energy Basic  Equity Income

Poor diversification

The 3 months correlation between Energy and Equity is 0.63. Overlapping area represents the amount of risk that can be diversified away by holding Energy Basic Materials and Equity Income Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Equity Income and Energy Basic 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 Energy Basic Materials are associated (or correlated) with Equity Income. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Equity Income has no effect on the direction of Energy Basic i.e., Energy Basic and Equity Income go up and down completely randomly.

Pair Corralation between Energy Basic and Equity Income

Assuming the 90 days horizon Energy Basic Materials is expected to under-perform the Equity Income. But the mutual fund apears to be less risky and, when comparing its historical volatility, Energy Basic Materials is 2.05 times less risky than Equity Income. The mutual fund trades about -0.61 of its potential returns per unit of risk. The Equity Income Fund is currently generating about -0.28 of returns per unit of risk over similar time horizon. If you would invest  945.00  in Equity Income Fund on September 21, 2024 and sell it today you would lose (111.00) from holding Equity Income Fund or give up 11.75% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	95.45%
Values	Daily Returns

Energy Basic Materials  vs.  Equity Income Fund

Energy Basic Materials

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Energy Basic Materials 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.

Equity Income

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Equity Income 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.

Pair Trading with Energy Basic and Equity Income

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

The idea behind Energy Basic Materials and Equity Income 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 Sectors module to list of equity sectors categorizing publicly traded companies based on their primary business activities.