Correlation Between Diageo PLC and Procter Gamble

Can any of the company-specific risk be diversified away by investing in both Diageo PLC and Procter Gamble 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 Procter Gamble 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 Procter Gamble, you can compare the effects of market volatilities on Diageo PLC and Procter Gamble 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 Procter Gamble. Check out your portfolio center. Please also check ongoing floating volatility patterns of Diageo PLC and Procter Gamble.

Diversification Opportunities for Diageo PLC and Procter Gamble

0.7

Correlation Coefficient

Diageo PLC  Procter Gamble

Poor diversification

The 3 months correlation between Diageo and Procter is 0.7. Overlapping area represents the amount of risk that can be diversified away by holding Diageo PLC ADR and Procter Gamble in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Procter Gamble 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 Procter Gamble. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Procter Gamble has no effect on the direction of Diageo PLC i.e., Diageo PLC and Procter Gamble go up and down completely randomly.

Pair Corralation between Diageo PLC and Procter Gamble

Considering the 90-day investment horizon Diageo PLC ADR is expected to under-perform the Procter Gamble. In addition to that, Diageo PLC is 1.34 times more volatile than Procter Gamble. It trades about -0.19 of its total potential returns per unit of risk. Procter Gamble is currently generating about 0.1 per unit of volatility. If you would invest  15,952  in Procter Gamble on January 26, 2024 and sell it today you would earn a total of  308.00  from holding Procter Gamble or generate 1.93% return on investment over 90 days.

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

Diageo PLC ADR  vs.  Procter Gamble

Diageo PLC ADR

Risk-Adjusted Performance

0 of 100

Weak

Over the last 90 days Diageo PLC ADR has generated negative risk-adjusted returns adding no value to investors with long positions. 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.

Procter Gamble

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Procter Gamble are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable technical and fundamental indicators, Procter Gamble is not utilizing all of its potentials. The latest stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with Diageo PLC and Procter Gamble

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

The idea behind Diageo PLC ADR and Procter Gamble 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 Idea Analyzer module to analyze all characteristics, volatility and risk-adjusted return of Macroaxis ideas.