Correlation Between Coca Cola and PepsiCo
Can any of the company-specific risk be diversified away by investing in both Coca Cola and PepsiCo 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 Coca Cola and PepsiCo into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between The Coca Cola and PepsiCo, you can compare the effects of market volatilities on Coca Cola and PepsiCo 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 Coca Cola with a short position of PepsiCo. Check out your portfolio center. Please also check ongoing floating volatility patterns of Coca Cola and PepsiCo.
Diversification Opportunities for Coca Cola and PepsiCo
Very poor diversification
The 3 months correlation between Coca and PepsiCo is 0.84. Overlapping area represents the amount of risk that can be diversified away by holding The Coca Cola and PepsiCo in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on PepsiCo and Coca Cola 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 The Coca Cola are associated (or correlated) with PepsiCo. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of PepsiCo has no effect on the direction of Coca Cola i.e., Coca Cola and PepsiCo go up and down completely randomly.
Pair Corralation between Coca Cola and PepsiCo
Allowing for the 90-day total investment horizon The Coca Cola is expected to under-perform the PepsiCo. But the stock apears to be less risky and, when comparing its historical volatility, The Coca Cola is 1.15 times less risky than PepsiCo. The stock trades about -0.29 of its potential returns per unit of risk. The PepsiCo is currently generating about -0.1 of returns per unit of risk over similar time horizon. If you would invest 16,940 in PepsiCo on August 26, 2024 and sell it today you would lose (740.00) from holding PepsiCo or give up 4.37% of portfolio value over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Strong |
| Accuracy | 100.0% |
| Values | Daily Returns |
The Coca Cola vs. PepsiCo
Performance |
| Timeline |
| Coca Cola |
| PepsiCo |
Coca Cola and PepsiCo Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Coca Cola and PepsiCo
The main advantage of trading using opposite Coca Cola and PepsiCo positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Coca Cola position performs unexpectedly, PepsiCo 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 PepsiCo will offset losses from the drop in PepsiCo's long position.The idea behind The Coca Cola and PepsiCo 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 Technical Analysis module to check basic technical indicators and analysis based on most latest market data.
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