Correlation Between Biotechnology Fund and Basic Materials
Can any of the company-specific risk be diversified away by investing in both Biotechnology Fund and Basic Materials 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 Biotechnology Fund and Basic Materials into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Biotechnology Fund Class and Basic Materials Fund, you can compare the effects of market volatilities on Biotechnology Fund and Basic Materials 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 Biotechnology Fund with a short position of Basic Materials. Check out your portfolio center. Please also check ongoing floating volatility patterns of Biotechnology Fund and Basic Materials.
Diversification Opportunities for Biotechnology Fund and Basic Materials
0.96 | Correlation Coefficient |
Almost no diversification
The 3 months correlation between Biotechnology and Basic is 0.96. Overlapping area represents the amount of risk that can be diversified away by holding Biotechnology Fund Class and Basic Materials Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Basic Materials and Biotechnology Fund 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 Biotechnology Fund Class are associated (or correlated) with Basic Materials. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Basic Materials has no effect on the direction of Biotechnology Fund i.e., Biotechnology Fund and Basic Materials go up and down completely randomly.
Pair Corralation between Biotechnology Fund and Basic Materials
Assuming the 90 days horizon Biotechnology Fund Class is expected to generate 0.99 times more return on investment than Basic Materials. However, Biotechnology Fund Class is 1.01 times less risky than Basic Materials. It trades about 0.03 of its potential returns per unit of risk. Basic Materials Fund is currently generating about 0.0 per unit of risk. If you would invest 5,722 in Biotechnology Fund Class on November 28, 2024 and sell it today you would earn a total of 30.00 from holding Biotechnology Fund Class or generate 0.52% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Very Strong |
| Accuracy | 100.0% |
| Values | Daily Returns |
Biotechnology Fund Class vs. Basic Materials Fund
Performance |
| Timeline |
| Biotechnology Fund Class |
| Basic Materials |
Biotechnology Fund and Basic Materials Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Biotechnology Fund and Basic Materials
The main advantage of trading using opposite Biotechnology Fund and Basic Materials positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Biotechnology Fund position performs unexpectedly, Basic Materials 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 Basic Materials will offset losses from the drop in Basic Materials' long position.The idea behind Biotechnology Fund Class and Basic Materials 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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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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.
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