Can any of the company-specific risk be diversified away by investing in both Cincinnati Financial and Dover 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 Cincinnati Financial and Dover into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Cincinnati Financial and Dover, you can compare the effects of market volatilities on Cincinnati Financial and Dover 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 Cincinnati Financial with a short position of Dover. Check out your portfolio center. Please also check ongoing floating volatility patterns of Cincinnati Financial and Dover.
Diversification Opportunities for Cincinnati Financial and Dover
The 3 months correlation between Cincinnati and Dover is 0.16. Overlapping area represents the amount of risk that can be diversified away by holding Cincinnati Financial and Dover in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Dover and Cincinnati Financial 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 Cincinnati Financial are associated (or correlated) with Dover. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Dover has no effect on the direction of Cincinnati Financial i.e., Cincinnati Financial and Dover go up and down completely randomly.
Pair Corralation between Cincinnati Financial and Dover
Given the investment horizon of 90 days Cincinnati Financial is expected to generate 4.04 times less return on investment than Dover. In addition to that, Cincinnati Financial is 1.16 times more volatile than Dover. It trades about 0.01 of its total potential returns per unit of risk. Dover is currently generating about 0.06 per unit of volatility. If you would invest 12,066 in Dover on March 6, 2024 and sell it today you would earn a total of 6,063 from holding Dover or generate 50.25% return on investment over 90 days.
Over the last 90 days Cincinnati Financial has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable basic indicators, Cincinnati Financial is not utilizing all of its potentials. The latest stock price disturbance, may contribute to mid-run losses for the stockholders.
Compared to the overall equity markets, risk-adjusted returns on investments in Dover are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of fairly inconsistent basic indicators, Dover may actually be approaching a critical reversion point that can send shares even higher in July 2024.