Correlation Between Health Care and Basic Materials
Can any of the company-specific risk be diversified away by investing in both Health Care 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 Health Care and Basic Materials into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Health Care Fund and Basic Materials Fund, you can compare the effects of market volatilities on Health Care 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 Health Care with a short position of Basic Materials. Check out your portfolio center. Please also check ongoing floating volatility patterns of Health Care and Basic Materials.
Diversification Opportunities for Health Care and Basic Materials
0.69 | Correlation Coefficient |
Poor diversification
The 3 months correlation between Health and Basic is 0.69. Overlapping area represents the amount of risk that can be diversified away by holding Health Care Fund and Basic Materials Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Basic Materials and Health Care 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 Health Care Fund 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 Health Care i.e., Health Care and Basic Materials go up and down completely randomly.
Pair Corralation between Health Care and Basic Materials
Assuming the 90 days horizon Health Care Fund is expected to generate 0.59 times more return on investment than Basic Materials. However, Health Care Fund is 1.69 times less risky than Basic Materials. It trades about 0.05 of its potential returns per unit of risk. Basic Materials Fund is currently generating about 0.01 per unit of risk. If you would invest 3,102 in Health Care Fund on November 1, 2024 and sell it today you would earn a total of 599.00 from holding Health Care Fund or generate 19.31% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Significant |
| Accuracy | 100.0% |
| Values | Daily Returns |
Health Care Fund vs. Basic Materials Fund
Performance |
| Timeline |
| Health Care Fund |
| Basic Materials |
Health Care and Basic Materials Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Health Care and Basic Materials
The main advantage of trading using opposite Health Care and Basic Materials positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Health Care 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.| Health Care vs. Basic Materials Fund | Health Care vs. Basic Materials Fund | Health Care vs. Banking Fund Class | Health Care vs. Basic Materials Fund |
| Basic Materials vs. Energy Fund Class | Basic Materials vs. Energy Services Fund | Basic Materials vs. Health Care Fund | Basic Materials vs. Banking Fund Class |
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 Suggestion module to get suggestions outside of your existing asset allocation including your own model portfolios.
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