Can any of the company-specific risk be diversified away by investing in both Salesforce and Alaska Air 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 Salesforce and Alaska Air into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Salesforce and Alaska Air Group, you can compare the effects of market volatilities on Salesforce and Alaska Air 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 Salesforce with a short position of Alaska Air. Check out your portfolio center. Please also check ongoing floating volatility patterns of Salesforce and Alaska Air.
Diversification Opportunities for Salesforce and Alaska Air
The 3 months correlation between Salesforce and Alaska is 0.6. Overlapping area represents the amount of risk that can be diversified away by holding Salesforce and Alaska Air Group in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Alaska Air Group and Salesforce 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 Salesforce are associated (or correlated) with Alaska Air. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Alaska Air Group has no effect on the direction of Salesforce i.e., Salesforce and Alaska Air go up and down completely randomly.
Pair Corralation between Salesforce and Alaska Air
Considering the 90-day investment horizon Salesforce is expected to generate 1.18 times more return on investment than Alaska Air. However, Salesforce is 1.18 times more volatile than Alaska Air Group. It trades about 0.51 of its potential returns per unit of risk. Alaska Air Group is currently generating about 0.51 per unit of risk. If you would invest 20,742 in Salesforce on September 5, 2023 and sell it today you would earn a total of 5,258 from holding Salesforce or generate 25.35% return on investment over 90 days.
Compared to the overall equity markets, risk-adjusted returns on investments in Salesforce are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. In spite of very unsteady basic indicators, Salesforce displayed solid returns over the last few months and may actually be approaching a breakup point.
Over the last 90 days Alaska Air Group has generated negative risk-adjusted returns adding no value to investors with long positions. Despite quite persistent essential indicators, Alaska Air is not utilizing all of its potentials. The latest stock price mess, may contribute to short-term losses for the institutional investors.
The main advantage of trading using opposite Salesforce and Alaska Air positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Salesforce position performs unexpectedly, Alaska Air 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 Alaska Air will offset losses from the drop in Alaska Air's long position.
The idea behind Salesforce and Alaska Air Group 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 Portfolio Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.
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