Can any of the company-specific risk be diversified away by investing in both Barloworld and ProShares UltraShort 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 Barloworld and ProShares UltraShort into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Barloworld Ltd ADR and ProShares UltraShort SP500, you can compare the effects of market volatilities on Barloworld and ProShares UltraShort 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 Barloworld with a short position of ProShares UltraShort. Check out your portfolio center. Please also check ongoing floating volatility patterns of Barloworld and ProShares UltraShort.
Diversification Opportunities for Barloworld and ProShares UltraShort
The 3 months correlation between Barloworld and ProShares is -0.14. Overlapping area represents the amount of risk that can be diversified away by holding Barloworld Ltd ADR and ProShares UltraShort SP500 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on ProShares UltraShort and Barloworld 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 Barloworld Ltd ADR are associated (or correlated) with ProShares UltraShort. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of ProShares UltraShort has no effect on the direction of Barloworld i.e., Barloworld and ProShares UltraShort go up and down completely randomly.
Pair Corralation between Barloworld and ProShares UltraShort
Assuming the 90 days horizon Barloworld Ltd ADR is expected to generate 6.71 times more return on investment than ProShares UltraShort. However, Barloworld is 6.71 times more volatile than ProShares UltraShort SP500. It trades about 0.12 of its potential returns per unit of risk. ProShares UltraShort SP500 is currently generating about -0.16 per unit of risk. If you would invest 411.00 in Barloworld Ltd ADR on March 6, 2024 and sell it today you would earn a total of 54.00 from holding Barloworld Ltd ADR or generate 13.14% return on investment over 90 days.
Compared to the overall equity markets, risk-adjusted returns on investments in Barloworld Ltd ADR are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of fairly inconsistent basic indicators, Barloworld showed solid returns over the last few months and may actually be approaching a breakup point.
Over the last 90 days ProShares UltraShort SP500 has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of comparatively stable fundamental indicators, ProShares UltraShort is not utilizing all of its potentials. The current stock price uproar, may contribute to short-horizon losses for the private investors.