Can any of the company-specific risk be diversified away by investing in both ConAgra Foods and Bunge 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 ConAgra Foods and Bunge into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between ConAgra Foods and Bunge Limited, you can compare the effects of market volatilities on ConAgra Foods and Bunge 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 ConAgra Foods with a short position of Bunge. Check out your portfolio center. Please also check ongoing floating volatility patterns of ConAgra Foods and Bunge.
Diversification Opportunities for ConAgra Foods and Bunge
The 3 months correlation between ConAgra and Bunge is 0.57. Overlapping area represents the amount of risk that can be diversified away by holding ConAgra Foods and Bunge Limited in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Bunge Limited and ConAgra Foods 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 ConAgra Foods are associated (or correlated) with Bunge. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Bunge Limited has no effect on the direction of ConAgra Foods i.e., ConAgra Foods and Bunge go up and down completely randomly.
Considering the 90-day investment horizon ConAgra Foods is expected to generate 0.91 times more return on investment than Bunge. However, ConAgra Foods is 1.1 times less risky than Bunge. It trades about 0.3 of its potential returns per unit of risk. Bunge Limited is currently generating about 0.11 per unit of risk. If you would invest 2,775 in ConAgra Foods on September 9, 2023 and sell it today you would earn a total of 177.00 from holding ConAgra Foods or generate 6.38% return on investment over 90 days.
Compared to the overall equity markets, risk-adjusted returns on investments in ConAgra Foods are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable basic indicators, ConAgra Foods is not utilizing all of its potentials. The latest stock price disturbance, may contribute to mid-run losses for the stockholders.
Over the last 90 days Bunge Limited has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest weak performance, the Stock's technical and fundamental indicators remain stable and the current disturbance on Wall Street may also be a sign of long-run gains for the company stockholders.
The main advantage of trading using opposite ConAgra Foods and Bunge positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if ConAgra Foods position performs unexpectedly, Bunge 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 Bunge will offset losses from the drop in Bunge's long position.
The idea behind ConAgra Foods and Bunge Limited 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 Money Managers module to screen money managers from public funds and ETFs managed around the world.
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