Correlation Between Russell 2000 and Basic Materials
Can any of the company-specific risk be diversified away by investing in both Russell 2000 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 Russell 2000 and Basic Materials into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Russell 2000 15x and Basic Materials Fund, you can compare the effects of market volatilities on Russell 2000 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 Russell 2000 with a short position of Basic Materials. Check out your portfolio center. Please also check ongoing floating volatility patterns of Russell 2000 and Basic Materials.
Diversification Opportunities for Russell 2000 and Basic Materials
0.26 | Correlation Coefficient |
Modest diversification
The 3 months correlation between Russell and Basic is 0.26. Overlapping area represents the amount of risk that can be diversified away by holding Russell 2000 15x and Basic Materials Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Basic Materials and Russell 2000 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 Russell 2000 15x 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 Russell 2000 i.e., Russell 2000 and Basic Materials go up and down completely randomly.
Pair Corralation between Russell 2000 and Basic Materials
Assuming the 90 days horizon Russell 2000 15x is expected to generate 1.95 times more return on investment than Basic Materials. However, Russell 2000 is 1.95 times more volatile than Basic Materials Fund. It trades about 0.01 of its potential returns per unit of risk. Basic Materials Fund is currently generating about -0.02 per unit of risk. If you would invest 6,350 in Russell 2000 15x on September 13, 2024 and sell it today you would lose (2.00) from holding Russell 2000 15x or give up 0.03% of portfolio value over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Very Weak |
| Accuracy | 95.45% |
| Values | Daily Returns |
Russell 2000 15x vs. Basic Materials Fund
Performance |
| Timeline |
| Russell 2000 15x |
| Basic Materials |
Russell 2000 and Basic Materials Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Russell 2000 and Basic Materials
The main advantage of trading using opposite Russell 2000 and Basic Materials positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Russell 2000 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.| Russell 2000 vs. Basic Materials Fund | Russell 2000 vs. Basic Materials Fund | Russell 2000 vs. Banking Fund Class | Russell 2000 vs. Basic Materials Fund |
| Basic Materials vs. Basic Materials Fund | Basic Materials vs. Energy Services Fund | Basic Materials vs. Energy Fund Class | Basic Materials 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 Price Ceiling Movement module to calculate and plot Price Ceiling Movement for different equity instruments.
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