Can any of the company-specific risk be diversified away by investing in both Delta Air and Copper Fox 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 Delta Air and Copper Fox into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Delta Air Lines and Copper Fox Metals, you can compare the effects of market volatilities on Delta Air and Copper Fox 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 Delta Air with a short position of Copper Fox. Check out your portfolio center. Please also check ongoing floating volatility patterns of Delta Air and Copper Fox.
Diversification Opportunities for Delta Air and Copper Fox
The 3 months correlation between Delta and Copper is 0.74. Overlapping area represents the amount of risk that can be diversified away by holding Delta Air Lines and Copper Fox Metals in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Copper Fox Metals and Delta Air 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 Delta Air Lines are associated (or correlated) with Copper Fox. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Copper Fox Metals has no effect on the direction of Delta Air i.e., Delta Air and Copper Fox go up and down completely randomly.
Considering the 90-day investment horizon Delta Air Lines is expected to generate 0.35 times more return on investment than Copper Fox. However, Delta Air Lines is 2.85 times less risky than Copper Fox. It trades about 0.52 of its potential returns per unit of risk. Copper Fox Metals is currently generating about 0.18 per unit of risk. If you would invest 3,202 in Delta Air Lines on September 3, 2023 and sell it today you would earn a total of 603.00 from holding Delta Air Lines or generate 18.83% return on investment over 90 days.
Over the last 90 days Delta Air Lines has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest abnormal performance, the Stock's basic indicators remain persistent and the latest mess on Wall Street may also be a sign of long-standing gains for the company institutional investors.
Compared to the overall equity markets, risk-adjusted returns on investments in Copper Fox Metals are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable basic indicators, Copper Fox is not utilizing all of its potentials. The latest stock price disturbance, may contribute to mid-run losses for the stockholders.
The main advantage of trading using opposite Delta Air and Copper Fox positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Delta Air position performs unexpectedly, Copper Fox 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 Copper Fox will offset losses from the drop in Copper Fox's long position.
The idea behind Delta Air Lines and Copper Fox Metals 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 Competition Analyzer module to analyze and compare many basic indicators for a group of related or unrelated entities.
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