Correlation Between Energy Services and Basic Materials
Can any of the company-specific risk be diversified away by investing in both Energy Services 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 Energy Services and Basic Materials into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Energy Services Fund and Basic Materials Fund, you can compare the effects of market volatilities on Energy Services 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 Energy Services with a short position of Basic Materials. Check out your portfolio center. Please also check ongoing floating volatility patterns of Energy Services and Basic Materials.
Diversification Opportunities for Energy Services and Basic Materials
0.1 | Correlation Coefficient |
Average diversification
The 3 months correlation between Energy and Basic is 0.1. Overlapping area represents the amount of risk that can be diversified away by holding Energy Services 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 Energy Services 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 Energy Services 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 Energy Services i.e., Energy Services and Basic Materials go up and down completely randomly.
Pair Corralation between Energy Services and Basic Materials
Assuming the 90 days horizon Energy Services Fund is expected to generate 2.6 times more return on investment than Basic Materials. However, Energy Services is 2.6 times more volatile than Basic Materials Fund. It trades about 0.21 of its potential returns per unit of risk. Basic Materials Fund is currently generating about -0.06 per unit of risk. If you would invest 22,242 in Energy Services Fund on August 24, 2024 and sell it today you would earn a total of 2,411 from holding Energy Services Fund or generate 10.84% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Insignificant |
| Accuracy | 100.0% |
| Values | Daily Returns |
Energy Services Fund vs. Basic Materials Fund
Performance |
| Timeline |
| Energy Services |
| Basic Materials |
Energy Services and Basic Materials Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Energy Services and Basic Materials
The main advantage of trading using opposite Energy Services and Basic Materials positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Energy Services 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.| Energy Services vs. Vanguard Energy Fund | Energy Services vs. Vanguard Energy Index | Energy Services vs. Fidelity Select Portfolios | Energy Services vs. Fidelity Advisor Energy |
| 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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.
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