Correlation Between Transportation Fund and Basic Materials

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

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

Diversification Opportunities for Transportation Fund and Basic Materials

0.82

Correlation Coefficient

Transportation Fund  Basic Materials

Very poor diversification

The 3 months correlation between Transportation and Basic is 0.82. Overlapping area represents the amount of risk that can be diversified away by holding Transportation Fund Class and Basic Materials Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Basic Materials and Transportation Fund 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 Transportation Fund Class 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 Transportation Fund i.e., Transportation Fund and Basic Materials go up and down completely randomly.

Pair Corralation between Transportation Fund and Basic Materials

Assuming the 90 days horizon Transportation Fund Class is expected to generate 1.33 times more return on investment than Basic Materials. However, Transportation Fund is 1.33 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 0.0 per unit of risk. If you would invest  3,952  in Transportation Fund Class on February 17, 2025 and sell it today you would earn a total of  348.00  from holding Transportation Fund Class or generate 8.81% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	100.0%
Values	Daily Returns

Transportation Fund Class  vs.  Basic Materials Fund

Transportation Fund Class

Risk-Adjusted Performance

Very Weak

Over the last 90 days Transportation Fund Class has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, Transportation Fund is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Basic Materials

Risk-Adjusted Performance

Very Weak

Over the last 90 days Basic Materials Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong primary indicators, Basic Materials is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Transportation Fund and Basic Materials

The main advantage of trading using opposite Transportation Fund and Basic Materials positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Transportation Fund 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.

The idea behind Transportation Fund Class and Basic Materials Fund 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.

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 Center module to all portfolio management and optimization tools to improve performance of your portfolios.