Can any of the company-specific risk be diversified away by investing in both Innospec and Colgate Palmolive 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 Innospec and Colgate Palmolive into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Innospec and Colgate Palmolive, you can compare the effects of market volatilities on Innospec and Colgate Palmolive 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 Innospec with a short position of Colgate Palmolive. Check out your portfolio center. Please also check ongoing floating volatility patterns of Innospec and Colgate Palmolive.
Diversification Opportunities for Innospec and Colgate Palmolive
The 3 months correlation between Innospec and Colgate is 0.6. Overlapping area represents the amount of risk that can be diversified away by holding Innospec and Colgate Palmolive in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Colgate Palmolive and Innospec 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 Innospec are associated (or correlated) with Colgate Palmolive. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Colgate Palmolive has no effect on the direction of Innospec i.e., Innospec and Colgate Palmolive go up and down completely randomly.
Pair Corralation between Innospec and Colgate Palmolive
Given the investment horizon of 90 days Innospec is expected to generate 1.83 times more return on investment than Colgate Palmolive. However, Innospec is 1.83 times more volatile than Colgate Palmolive. It trades about 0.13 of its potential returns per unit of risk. Colgate Palmolive is currently generating about -0.01 per unit of risk. If you would invest 12,367 in Innospec on March 6, 2024 and sell it today you would earn a total of 486.00 from holding Innospec or generate 3.93% return on investment over 90 days.
Compared to the overall equity markets, risk-adjusted returns on investments in Innospec are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. Even with relatively invariable basic indicators, Innospec is not utilizing all of its potentials. The latest stock price agitation, may contribute to short-term losses for the retail investors.
Compared to the overall equity markets, risk-adjusted returns on investments in Colgate Palmolive are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. Despite quite weak essential indicators, Colgate Palmolive may actually be approaching a critical reversion point that can send shares even higher in July 2024.