Correlation Between Precious Metals and Basic Materials
Can any of the company-specific risk be diversified away by investing in both Precious Metals 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 Precious Metals and Basic Materials into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Precious Metals Fund and Basic Materials Fund, you can compare the effects of market volatilities on Precious Metals 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 Precious Metals with a short position of Basic Materials. Check out your portfolio center. Please also check ongoing floating volatility patterns of Precious Metals and Basic Materials.
Diversification Opportunities for Precious Metals and Basic Materials
0.64 | Correlation Coefficient |
Poor diversification
The 3 months correlation between Precious and Basic is 0.64. Overlapping area represents the amount of risk that can be diversified away by holding Precious Metals 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 Precious Metals 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 Precious Metals 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 Precious Metals i.e., Precious Metals and Basic Materials go up and down completely randomly.
Pair Corralation between Precious Metals and Basic Materials
Assuming the 90 days horizon Precious Metals Fund is expected to generate 2.0 times more return on investment than Basic Materials. However, Precious Metals is 2.0 times more volatile than Basic Materials Fund. It trades about 0.08 of its potential returns per unit of risk. Basic Materials Fund is currently generating about 0.07 per unit of risk. If you would invest 3,080 in Precious Metals Fund on August 28, 2024 and sell it today you would earn a total of 1,024 from holding Precious Metals Fund or generate 33.25% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Significant |
| Accuracy | 100.0% |
| Values | Daily Returns |
Precious Metals Fund vs. Basic Materials Fund
Performance |
| Timeline |
| Precious Metals |
| Basic Materials |
Precious Metals and Basic Materials Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Precious Metals and Basic Materials
The main advantage of trading using opposite Precious Metals and Basic Materials positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Precious Metals 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.| Precious Metals vs. Energy Fund Investor | Precious Metals vs. Energy Services Fund | Precious Metals vs. Basic Materials Fund | Precious Metals vs. Health Care Fund |
| Basic Materials vs. Energy Fund Investor | Basic Materials vs. Energy Services Fund | Basic Materials vs. Health Care Fund | Basic Materials vs. Banking 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 Global Correlations module to find global opportunities by holding instruments from different markets.
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