Can any of the company-specific risk be diversified away by investing in both Cincinnati Financial and Leggett Platt 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 Leggett Platt into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Cincinnati Financial and Leggett Platt Incorporated, you can compare the effects of market volatilities on Cincinnati Financial and Leggett Platt 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 Leggett Platt. Check out your portfolio center. Please also check ongoing floating volatility patterns of Cincinnati Financial and Leggett Platt.
Diversification Opportunities for Cincinnati Financial and Leggett Platt
The 3 months correlation between Cincinnati and Leggett is 0.03. Overlapping area represents the amount of risk that can be diversified away by holding Cincinnati Financial and Leggett Platt Incorporated in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Leggett Platt 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 Leggett Platt. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Leggett Platt has no effect on the direction of Cincinnati Financial i.e., Cincinnati Financial and Leggett Platt go up and down completely randomly.
Pair Corralation between Cincinnati Financial and Leggett Platt
Given the investment horizon of 90 days Cincinnati Financial is expected to generate 0.34 times more return on investment than Leggett Platt. However, Cincinnati Financial is 2.91 times less risky than Leggett Platt. It trades about -0.07 of its potential returns per unit of risk. Leggett Platt Incorporated is currently generating about -0.2 per unit of risk. If you would invest 11,738 in Cincinnati Financial on March 6, 2024 and sell it today you would lose (169.00) from holding Cincinnati Financial or give up 1.44% of portfolio value 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.
Over the last 90 days Leggett Platt Incorporated has generated negative risk-adjusted returns adding no value to investors with long positions. Despite unsteady performance in the last few months, the Stock's technical and fundamental indicators remain nearly stable which may send shares a bit higher in July 2024. The current disturbance may also be a sign of long-run up-swing for the company stockholders.