Correlation Between Salesforce and Encore Wire

Can any of the company-specific risk be diversified away by investing in both Salesforce and Encore Wire 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 Encore Wire into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Salesforce and Encore Wire, you can compare the effects of market volatilities on Salesforce and Encore Wire 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 Encore Wire. Check out your portfolio center. Please also check ongoing floating volatility patterns of Salesforce and Encore Wire.

Diversification Opportunities for Salesforce and Encore Wire

-0.14

Correlation Coefficient

Salesforce  Encore Wire

Good diversification

The 3 months correlation between Salesforce and Encore is -0.14. Overlapping area represents the amount of risk that can be diversified away by holding Salesforce and Encore Wire in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Encore Wire 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 Encore Wire. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Encore Wire has no effect on the direction of Salesforce i.e., Salesforce and Encore Wire go up and down completely randomly.

Pair Corralation between Salesforce and Encore Wire

Considering the 90-day investment horizon Salesforce is expected to under-perform the Encore Wire. But the stock apears to be less risky and, when comparing its historical volatility, Salesforce is 1.44 times less risky than Encore Wire. The stock trades about -0.22 of its potential returns per unit of risk. The Encore Wire is currently generating about 0.25 of returns per unit of risk over similar time horizon. If you would invest  24,501  in Encore Wire on January 25, 2024 and sell it today you would earn a total of  3,849  from holding Encore Wire or generate 15.71% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	100.0%
Values	Daily Returns

Salesforce  vs.  Encore Wire

Salesforce

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Salesforce has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy basic indicators, Salesforce is not utilizing all of its potentials. The recent stock price disarray, may contribute to short-term losses for the investors.

Encore Wire

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Encore Wire are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. In spite of rather uncertain basic indicators, Encore Wire exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Salesforce and Encore Wire

The main advantage of trading using opposite Salesforce and Encore Wire positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Salesforce position performs unexpectedly, Encore Wire 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 Encore Wire will offset losses from the drop in Encore Wire's long position.

The idea behind Salesforce and Encore Wire 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 Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.