Correlation Between Stepan and PACCAR
Can any of the company-specific risk be diversified away by investing in both Stepan and PACCAR 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 Stepan and PACCAR into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Stepan Company and PACCAR Inc, you can compare the effects of market volatilities on Stepan and PACCAR 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 Stepan with a short position of PACCAR. Check out your portfolio center. Please also check ongoing floating volatility patterns of Stepan and PACCAR.
Diversification Opportunities for Stepan and PACCAR
Very weak diversification
The 3 months correlation between Stepan and PACCAR is 0.4. Overlapping area represents the amount of risk that can be diversified away by holding Stepan Company and PACCAR Inc in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on PACCAR Inc and Stepan 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 Stepan Company are associated (or correlated) with PACCAR. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of PACCAR Inc has no effect on the direction of Stepan i.e., Stepan and PACCAR go up and down completely randomly.
Pair Corralation between Stepan and PACCAR
Considering the 90-day investment horizon Stepan is expected to generate 2.85 times less return on investment than PACCAR. In addition to that, Stepan is 1.08 times more volatile than PACCAR Inc. It trades about 0.08 of its total potential returns per unit of risk. PACCAR Inc is currently generating about 0.25 per unit of volatility. If you would invest 10,455 in PACCAR Inc on September 5, 2024 and sell it today you would earn a total of 1,230 from holding PACCAR Inc or generate 11.76% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Weak |
| Accuracy | 95.45% |
| Values | Daily Returns |
Stepan Company vs. PACCAR Inc
Performance |
| Timeline |
| Stepan Company |
| PACCAR Inc |
Stepan and PACCAR Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Stepan and PACCAR
The main advantage of trading using opposite Stepan and PACCAR positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Stepan position performs unexpectedly, PACCAR 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 PACCAR will offset losses from the drop in PACCAR's long position.The idea behind Stepan Company and PACCAR Inc 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 Holdings module to check your current holdings and cash postion to detemine if your portfolio needs rebalancing.
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