Correlation Between ABB and Encore Wire

Can any of the company-specific risk be diversified away by investing in both ABB and Encore Wire 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 ABB and Encore Wire into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between ABB Ltd ADR and Encore Wire, you can compare the effects of market volatilities on ABB and Encore Wire 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 ABB with a short position of Encore Wire. Check out your portfolio center. Please also check ongoing floating volatility patterns of ABB and Encore Wire.

Diversification Opportunities for ABB and Encore Wire

0.65

Correlation Coefficient

ABB  Encore Wire

Poor diversification

The 3 months correlation between ABB and Encore is 0.65. Overlapping area represents the amount of risk that can be diversified away by holding ABB Ltd ADR and Encore Wire in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Encore Wire and ABB 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 ABB Ltd ADR are associated (or correlated) with Encore Wire. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Encore Wire has no effect on the direction of ABB i.e., ABB and Encore Wire go up and down completely randomly.

Pair Corralation between ABB and Encore Wire

If you would invest  23,733  in Encore Wire on January 20, 2024 and sell it today you would earn a total of  4,967  from holding Encore Wire or generate 20.93% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	4.76%
Values	Daily Returns

ABB Ltd ADR  vs.  Encore Wire

ABB Ltd ADR

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days ABB Ltd ADR has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong fundamental drivers, ABB is not utilizing all of its potentials. The newest stock price disturbance, may contribute to short-term losses for the investors.

Encore Wire

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Encore Wire are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady basic indicators, Encore Wire exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with ABB and Encore Wire

The main advantage of trading using opposite ABB and Encore Wire positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if ABB position performs unexpectedly, Encore Wire 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 Encore Wire will offset losses from the drop in Encore Wire's long position.

The idea behind ABB Ltd ADR and Encore Wire 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.

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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 Dashboard module to portfolio dashboard that provides centralized access to all your investments.