Correlation Between South Beach and North Bay
Can any of the company-specific risk be diversified away by investing in both South Beach and North Bay 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 South Beach and North Bay into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between South Beach Spirits and North Bay Resources, you can compare the effects of market volatilities on South Beach and North Bay 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 South Beach with a short position of North Bay. Check out your portfolio center. Please also check ongoing floating volatility patterns of South Beach and North Bay.
Diversification Opportunities for South Beach and North Bay
0.5 | Correlation Coefficient |
Very weak diversification
The 3 months correlation between South and North is 0.5. Overlapping area represents the amount of risk that can be diversified away by holding South Beach Spirits and North Bay Resources in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on North Bay Resources and South Beach 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 South Beach Spirits are associated (or correlated) with North Bay. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of North Bay Resources has no effect on the direction of South Beach i.e., South Beach and North Bay go up and down completely randomly.
Pair Corralation between South Beach and North Bay
Given the investment horizon of 90 days South Beach Spirits is expected to generate 1.8 times more return on investment than North Bay. However, South Beach is 1.8 times more volatile than North Bay Resources. It trades about 0.14 of its potential returns per unit of risk. North Bay Resources is currently generating about 0.12 per unit of risk. If you would invest 0.06 in South Beach Spirits on October 23, 2024 and sell it today you would lose (0.02) from holding South Beach Spirits or give up 33.33% of portfolio value over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Weak |
| Accuracy | 99.8% |
| Values | Daily Returns |
South Beach Spirits vs. North Bay Resources
Performance |
| Timeline |
| South Beach Spirits |
| North Bay Resources |
South Beach and North Bay Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with South Beach and North Bay
The main advantage of trading using opposite South Beach and North Bay positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if South Beach position performs unexpectedly, North Bay 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 North Bay will offset losses from the drop in North Bay's long position.| South Beach vs. Brown Forman | South Beach vs. Brown Forman | South Beach vs. Diageo PLC ADR | South Beach vs. Pernod Ricard SA |
| North Bay vs. Diamond Fields Resources | North Bay vs. EnviroGold Global Limited | North Bay vs. Gemfields Group Limited | North Bay vs. Pacific Ridge Exploration |
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 Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.
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