Correlation Between Basic Materials and 3M

Can any of the company-specific risk be diversified away by investing in both Basic Materials and 3M 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 Basic Materials and 3M into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Basic Materials and 3M Company, you can compare the effects of market volatilities on Basic Materials and 3M 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 Basic Materials with a short position of 3M. Check out your portfolio center. Please also check ongoing floating volatility patterns of Basic Materials and 3M.

Diversification Opportunities for Basic Materials and 3M

0.38

Correlation Coefficient

Basic Materials  3M

Weak diversification

The 3 months correlation between Basic and 3M is 0.38. Overlapping area represents the amount of risk that can be diversified away by holding Basic Materials and 3M Company in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on 3M Company and Basic Materials 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 Basic Materials are associated (or correlated) with 3M. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of 3M Company has no effect on the direction of Basic Materials i.e., Basic Materials and 3M go up and down completely randomly.

Pair Corralation between Basic Materials and 3M

Assuming the 90 days trading horizon Basic Materials is expected to generate 0.62 times more return on investment than 3M. However, Basic Materials is 1.6 times less risky than 3M. It trades about 0.01 of its potential returns per unit of risk. 3M Company is currently generating about -0.01 per unit of risk. If you would invest  575,662  in Basic Materials on February 7, 2024 and sell it today you would earn a total of  9,219  from holding Basic Materials or generate 1.6% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	99.67%
Values	Daily Returns

Basic Materials  vs.  3M Company

Pair Trading with Basic Materials and 3M

The main advantage of trading using opposite Basic Materials and 3M positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Basic Materials position performs unexpectedly, 3M 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 3M will offset losses from the drop in 3M's long position.

The idea behind Basic Materials and 3M Company 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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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 Economic Indicators module to top statistical indicators that provide insights into how an economy is performing.