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
0.1 | Correlation Coefficient |
Average diversification
The 3 months correlation between Basic and Precious is 0.1. 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 1.14 times less risky than Precious Metals. The mutual fund trades about -0.06 of its potential returns per unit of risk. The Precious Metals Fund is currently generating about 0.15 of returns per unit of risk over similar time horizon. If you would invest 9,993 in Precious Metals Fund on January 13, 2025 and sell it today you would earn a total of 1,080 from holding Precious Metals Fund or generate 10.81% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Insignificant |
| Accuracy | 100.0% |
| Values | Daily Returns |
Basic Materials Fund vs. Precious Metals Fund
Performance |
| Timeline |
| Basic Materials |
| Precious Metals |
Basic Materials and Precious Metals Volatility Contrast
Predicted Return Density |
| Returns |
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.| Basic Materials vs. Energy Fund Class | Basic Materials vs. Energy Services Fund | Basic Materials vs. Health Care Fund | Basic Materials vs. Banking Fund Class |
| Precious Metals vs. Basic Materials Fund | Precious Metals vs. Basic Materials Fund | Precious Metals vs. Banking Fund Class | Precious Metals vs. Basic Materials Fund |
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 Efficient Frontier module to plot and analyze your portfolio and positions against risk-return landscape of the market..
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