Correlation Between Basic Materials and Sp 500
Can any of the company-specific risk be diversified away by investing in both Basic Materials and Sp 500 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 Sp 500 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 Sp 500 2x, you can compare the effects of market volatilities on Basic Materials and Sp 500 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 Sp 500. Check out your portfolio center. Please also check ongoing floating volatility patterns of Basic Materials and Sp 500.
Diversification Opportunities for Basic Materials and Sp 500
0.74 | Correlation Coefficient |
Poor diversification
The 3 months correlation between Basic and RYCTX is 0.74. Overlapping area represents the amount of risk that can be diversified away by holding Basic Materials Fund and Sp 500 2x in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Sp 500 2x 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 Sp 500. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Sp 500 2x has no effect on the direction of Basic Materials i.e., Basic Materials and Sp 500 go up and down completely randomly.
Pair Corralation between Basic Materials and Sp 500
Assuming the 90 days horizon Basic Materials Fund is expected to under-perform the Sp 500. But the mutual fund apears to be less risky and, when comparing its historical volatility, Basic Materials Fund is 1.95 times less risky than Sp 500. The mutual fund trades about -0.02 of its potential returns per unit of risk. The Sp 500 2x is currently generating about 0.13 of returns per unit of risk over similar time horizon. If you would invest 27,489 in Sp 500 2x on August 27, 2024 and sell it today you would earn a total of 1,234 from holding Sp 500 2x or generate 4.49% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Significant |
| Accuracy | 100.0% |
| Values | Daily Returns |
Basic Materials Fund vs. Sp 500 2x
Performance |
| Timeline |
| Basic Materials |
| Sp 500 2x |
Basic Materials and Sp 500 Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Basic Materials and Sp 500
The main advantage of trading using opposite Basic Materials and Sp 500 positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Basic Materials position performs unexpectedly, Sp 500 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 Sp 500 will offset losses from the drop in Sp 500's long position.| Basic Materials vs. Energy Fund Investor | Basic Materials vs. Energy Services Fund | Basic Materials vs. Health Care Fund | Basic Materials vs. Banking Fund Investor |
| Sp 500 vs. Barings Global Floating | Sp 500 vs. Ms Global Fixed | Sp 500 vs. T Rowe Price | Sp 500 vs. The Hartford Global |
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 Portfolio Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.
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