Correlation Between Australian Agricultural and Errawarra Resources
Can any of the company-specific risk be diversified away by investing in both Australian Agricultural and Errawarra Resources 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 Australian Agricultural and Errawarra Resources into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Australian Agricultural and Errawarra Resources, you can compare the effects of market volatilities on Australian Agricultural and Errawarra Resources 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 Australian Agricultural with a short position of Errawarra Resources. Check out your portfolio center. Please also check ongoing floating volatility patterns of Australian Agricultural and Errawarra Resources.
Diversification Opportunities for Australian Agricultural and Errawarra Resources
0.64 | Correlation Coefficient |
Poor diversification
The 3 months correlation between Australian and Errawarra is 0.64. Overlapping area represents the amount of risk that can be diversified away by holding Australian Agricultural and Errawarra Resources in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Errawarra Resources and Australian Agricultural 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 Australian Agricultural are associated (or correlated) with Errawarra Resources. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Errawarra Resources has no effect on the direction of Australian Agricultural i.e., Australian Agricultural and Errawarra Resources go up and down completely randomly.
Pair Corralation between Australian Agricultural and Errawarra Resources
Assuming the 90 days trading horizon Australian Agricultural is expected to under-perform the Errawarra Resources. But the stock apears to be less risky and, when comparing its historical volatility, Australian Agricultural is 10.12 times less risky than Errawarra Resources. The stock trades about -0.09 of its potential returns per unit of risk. The Errawarra Resources is currently generating about 0.01 of returns per unit of risk over similar time horizon. If you would invest 8.60 in Errawarra Resources on August 28, 2024 and sell it today you would lose (0.80) from holding Errawarra Resources or give up 9.3% of portfolio value over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Significant |
| Accuracy | 100.0% |
| Values | Daily Returns |
Australian Agricultural vs. Errawarra Resources
Performance |
| Timeline |
| Australian Agricultural |
| Errawarra Resources |
Australian Agricultural and Errawarra Resources Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Australian Agricultural and Errawarra Resources
The main advantage of trading using opposite Australian Agricultural and Errawarra Resources positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Australian Agricultural position performs unexpectedly, Errawarra Resources 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 Errawarra Resources will offset losses from the drop in Errawarra Resources' long position.The idea behind Australian Agricultural and Errawarra Resources 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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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 Manager module to state of the art Portfolio Manager to monitor and improve performance of your invested capital.
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