Correlation Between Diageo PLC and Diamond Estates

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

By analyzing existing cross correlation between Diageo PLC ADR and Diamond Estates Wines, you can compare the effects of market volatilities on Diageo PLC and Diamond Estates 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 Diageo PLC with a short position of Diamond Estates. Check out your portfolio center. Please also check ongoing floating volatility patterns of Diageo PLC and Diamond Estates.

Diversification Opportunities for Diageo PLC and Diamond Estates

-0.1

Correlation Coefficient

Diageo PLC  Diamond Estates

Good diversification

The 3 months correlation between Diageo and Diamond is -0.1. Overlapping area represents the amount of risk that can be diversified away by holding Diageo PLC ADR and Diamond Estates Wines in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Diamond Estates Wines and Diageo PLC 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 Diageo PLC ADR are associated (or correlated) with Diamond Estates. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Diamond Estates Wines has no effect on the direction of Diageo PLC i.e., Diageo PLC and Diamond Estates go up and down completely randomly.

Pair Corralation between Diageo PLC and Diamond Estates

Considering the 90-day investment horizon Diageo PLC is expected to generate 1.56 times less return on investment than Diamond Estates. But when comparing it to its historical volatility, Diageo PLC ADR is 1.58 times less risky than Diamond Estates. It trades about 0.07 of its potential returns per unit of risk. Diamond Estates Wines is currently generating about 0.06 of returns per unit of risk over similar time horizon. If you would invest  15.00  in Diamond Estates Wines on January 24, 2024 and sell it today you would earn a total of  1.00  from holding Diamond Estates Wines or generate 6.67% return on investment over 90 days.

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

Diageo PLC ADR  vs.  Diamond Estates Wines

Diageo PLC ADR

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Diageo PLC ADR are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy technical and fundamental indicators, Diageo PLC is not utilizing all of its potentials. The current stock price disarray, may contribute to short-term losses for the investors.

Diamond Estates Wines

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Diamond Estates Wines are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile technical and fundamental indicators, Diamond Estates may actually be approaching a critical reversion point that can send shares even higher in May 2024.

Pair Trading with Diageo PLC and Diamond Estates

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

The idea behind Diageo PLC ADR and Diamond Estates Wines 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.

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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 Correlation Analysis module to reduce portfolio risk simply by holding instruments which are not perfectly correlated.