Correlation Between Arad and Elco

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Can any of the company-specific risk be diversified away by investing in both Arad and Elco 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 Arad and Elco into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Arad and Elco, you can compare the effects of market volatilities on Arad and Elco 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 Arad with a short position of Elco. Check out your portfolio center. Please also check ongoing floating volatility patterns of Arad and Elco.

Diversification Opportunities for Arad and Elco

0.8
  Correlation Coefficient

Very poor diversification

The 3 months correlation between Arad and Elco is 0.8. Overlapping area represents the amount of risk that can be diversified away by holding Arad and Elco in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Elco and Arad 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 Arad are associated (or correlated) with Elco. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Elco has no effect on the direction of Arad i.e., Arad and Elco go up and down completely randomly.

Pair Corralation between Arad and Elco

Assuming the 90 days trading horizon Arad is expected to generate 97.01 times less return on investment than Elco. In addition to that, Arad is 1.13 times more volatile than Elco. It trades about 0.01 of its total potential returns per unit of risk. Elco is currently generating about 0.57 per unit of volatility. If you would invest  1,123,000  in Elco on August 30, 2024 and sell it today you would earn a total of  199,000  from holding Elco or generate 17.72% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthStrong
Accuracy100.0%
ValuesDaily Returns

Arad  vs.  Elco

 Performance 
       Timeline  
Arad 

Risk-Adjusted Performance

7 of 100

 
Weak
 
Strong
OK
Compared to the overall equity markets, risk-adjusted returns on investments in Arad are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak fundamental indicators, Arad may actually be approaching a critical reversion point that can send shares even higher in December 2024.
Elco 

Risk-Adjusted Performance

14 of 100

 
Weak
 
Strong
Good
Compared to the overall equity markets, risk-adjusted returns on investments in Elco are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Elco sustained solid returns over the last few months and may actually be approaching a breakup point.

Arad and Elco Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Arad and Elco

The main advantage of trading using opposite Arad and Elco positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Arad position performs unexpectedly, Elco 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 Elco will offset losses from the drop in Elco's long position.
The idea behind Arad and Elco 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 Efficient Frontier module to plot and analyze your portfolio and positions against risk-return landscape of the market..

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