Correlation Between Basic Materials and Nasdaq 100
Can any of the company-specific risk be diversified away by investing in both Basic Materials and Nasdaq 100 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 Nasdaq 100 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 Nasdaq 100 2x Strategy, you can compare the effects of market volatilities on Basic Materials and Nasdaq 100 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 Nasdaq 100. Check out your portfolio center. Please also check ongoing floating volatility patterns of Basic Materials and Nasdaq 100.
Diversification Opportunities for Basic Materials and Nasdaq 100
0.72 | Correlation Coefficient |
Poor diversification
The 3 months correlation between Basic and Nasdaq is 0.72. Overlapping area represents the amount of risk that can be diversified away by holding Basic Materials Fund and Nasdaq 100 2x Strategy in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Nasdaq 100 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 Nasdaq 100. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Nasdaq 100 2x has no effect on the direction of Basic Materials i.e., Basic Materials and Nasdaq 100 go up and down completely randomly.
Pair Corralation between Basic Materials and Nasdaq 100
Assuming the 90 days horizon Basic Materials Fund is expected to under-perform the Nasdaq 100. But the mutual fund apears to be less risky and, when comparing its historical volatility, Basic Materials Fund is 2.61 times less risky than Nasdaq 100. The mutual fund trades about -0.02 of its potential returns per unit of risk. The Nasdaq 100 2x Strategy is currently generating about 0.08 of returns per unit of risk over similar time horizon. If you would invest 55,303 in Nasdaq 100 2x Strategy on August 27, 2024 and sell it today you would earn a total of 1,955 from holding Nasdaq 100 2x Strategy or generate 3.54% 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. Nasdaq 100 2x Strategy
Performance |
| Timeline |
| Basic Materials |
| Nasdaq 100 2x |
Basic Materials and Nasdaq 100 Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Basic Materials and Nasdaq 100
The main advantage of trading using opposite Basic Materials and Nasdaq 100 positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Basic Materials position performs unexpectedly, Nasdaq 100 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 Nasdaq 100 will offset losses from the drop in Nasdaq 100's long position.| Basic Materials vs. Basic Materials Fund | Basic Materials vs. Energy Services Fund | Basic Materials vs. Energy Fund Class | Basic Materials vs. Basic Materials Fund |
| Nasdaq 100 vs. Direxion Monthly Nasdaq 100 | Nasdaq 100 vs. Ultranasdaq 100 Profund Ultranasdaq 100 | Nasdaq 100 vs. Dow 2x Strategy |
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 Volatility Analysis module to get historical volatility and risk analysis based on latest market data.
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