Correlation Between Energy Basic and Income Stock

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

Diversification Opportunities for Energy Basic and Income Stock

0.86

Correlation Coefficient

Energy Basic  Income Stock

Very poor diversification

The 3 months correlation between Energy and Income is 0.86. Overlapping area represents the amount of risk that can be diversified away by holding Energy Basic Materials and Income Stock Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Income Stock 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 Income Stock. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Income Stock has no effect on the direction of Energy Basic i.e., Energy Basic and Income Stock go up and down completely randomly.

Pair Corralation between Energy Basic and Income Stock

Assuming the 90 days horizon Energy Basic Materials is expected to generate 0.48 times more return on investment than Income Stock. However, Energy Basic Materials is 2.09 times less risky than Income Stock. It trades about -0.17 of its potential returns per unit of risk. Income Stock Fund is currently generating about -0.13 per unit of risk. If you would invest  1,272  in Energy Basic Materials on September 29, 2024 and sell it today you would lose (125.00) from holding Energy Basic Materials or give up 9.83% of portfolio value over 90 days.

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

Energy Basic Materials  vs.  Income Stock 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.

Income Stock

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Income Stock 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 basic 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.

Pair Trading with Energy Basic and Income Stock

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

The idea behind Energy Basic Materials and Income Stock 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 Portfolio Comparator module to compare the composition, asset allocations and performance of any two portfolios in your account.