Correlation Between Basic Materials and Real Estate
Can any of the company-specific risk be diversified away by investing in both Basic Materials and Real Estate 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 Real Estate 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 Real Estate Fund, you can compare the effects of market volatilities on Basic Materials and Real Estate 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 Real Estate. Check out your portfolio center. Please also check ongoing floating volatility patterns of Basic Materials and Real Estate.
Diversification Opportunities for Basic Materials and Real Estate
0.44 | Correlation Coefficient |
Very weak diversification
The 3 months correlation between Basic and Real is 0.44. Overlapping area represents the amount of risk that can be diversified away by holding Basic Materials Fund and Real Estate Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Real Estate Fund 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 Real Estate. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Real Estate Fund has no effect on the direction of Basic Materials i.e., Basic Materials and Real Estate go up and down completely randomly.
Pair Corralation between Basic Materials and Real Estate
Assuming the 90 days horizon Basic Materials is expected to generate 1.2 times less return on investment than Real Estate. But when comparing it to its historical volatility, Basic Materials Fund is 1.08 times less risky than Real Estate. It trades about 0.03 of its potential returns per unit of risk. Real Estate Fund is currently generating about 0.03 of returns per unit of risk over similar time horizon. If you would invest 3,547 in Real Estate Fund on August 24, 2024 and sell it today you would earn a total of 654.00 from holding Real Estate Fund or generate 18.44% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Weak |
| Accuracy | 100.0% |
| Values | Daily Returns |
Basic Materials Fund vs. Real Estate Fund
Performance |
| Timeline |
| Basic Materials |
| Real Estate Fund |
Basic Materials and Real Estate Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Basic Materials and Real Estate
The main advantage of trading using opposite Basic Materials and Real Estate positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Basic Materials position performs unexpectedly, Real Estate 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 Real Estate will offset losses from the drop in Real Estate'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 |
| Real Estate vs. Utilities Fund Investor | Real Estate vs. Emerging Markets Fund | Real Estate vs. Heritage Fund Investor | Real Estate vs. Value Fund Investor |
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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