Can any of the company-specific risk be diversified away by investing in both Salesforce and Meta Platforms 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 Meta Platforms into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Salesforce and Meta Platforms, you can compare the effects of market volatilities on Salesforce and Meta Platforms 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 Meta Platforms. Check out your portfolio center. Please also check ongoing floating volatility patterns of Salesforce and Meta Platforms.
Diversification Opportunities for Salesforce and Meta Platforms
The 3 months correlation between Salesforce and Meta is 0.45. Overlapping area represents the amount of risk that can be diversified away by holding Salesforce and Meta Platforms in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Meta Platforms 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 Meta Platforms. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Meta Platforms has no effect on the direction of Salesforce i.e., Salesforce and Meta Platforms go up and down completely randomly.
Pair Corralation between Salesforce and Meta Platforms
Considering the 90-day investment horizon Salesforce is expected to generate 1.84 times more return on investment than Meta Platforms. However, Salesforce is 1.84 times more volatile than Meta Platforms. It trades about 0.49 of its potential returns per unit of risk. Meta Platforms is currently generating about 0.18 per unit of risk. If you would invest 20,811 in Salesforce on September 3, 2023 and sell it today you would earn a total of 5,189 from holding Salesforce or generate 24.93% 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 unfluctuating basic indicators, Salesforce displayed solid returns over the last few months and may actually be approaching a breakup point.
Compared to the overall equity markets, risk-adjusted returns on investments in Meta Platforms are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Despite somewhat unfluctuating basic indicators, Meta Platforms may actually be approaching a critical reversion point that can send shares even higher in January 2024.
The main advantage of trading using opposite Salesforce and Meta Platforms positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Salesforce position performs unexpectedly, Meta Platforms 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 Meta Platforms will offset losses from the drop in Meta Platforms' long position.
The idea behind Salesforce and Meta Platforms 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 Share Portfolio module to track or share privately all of your investments from the convenience of any device.
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