Correlation Between Deluxe and Encore Wire

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

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

Diversification Opportunities for Deluxe and Encore Wire

0.12

Correlation Coefficient

Deluxe  Encore Wire

Average diversification

The 3 months correlation between Deluxe and Encore is 0.12. Overlapping area represents the amount of risk that can be diversified away by holding Deluxe and Encore Wire in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Encore Wire and Deluxe 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 Deluxe 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 Deluxe i.e., Deluxe and Encore Wire go up and down completely randomly.

Pair Corralation between Deluxe and Encore Wire

Considering the 90-day investment horizon Deluxe is expected to under-perform the Encore Wire. But the stock apears to be less risky and, when comparing its historical volatility, Deluxe is 1.1 times less risky than Encore Wire. The stock trades about 0.0 of its potential returns per unit of risk. The Encore Wire is currently generating about 0.07 of returns per unit of risk over similar time horizon. If you would invest  12,848  in Encore Wire on January 26, 2024 and sell it today you would earn a total of  15,393  from holding Encore Wire or generate 119.81% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Insignificant
Accuracy	99.8%
Values	Daily Returns

Deluxe  vs.  Encore Wire

Deluxe

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Deluxe are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. In spite of fairly strong essential indicators, Deluxe is not utilizing all of its potentials. The latest stock price disturbance, may contribute to short-term losses for the investors.

Encore Wire

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Encore Wire are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady basic indicators, Encore Wire exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Deluxe and Encore Wire

The main advantage of trading using opposite Deluxe and Encore Wire positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Deluxe 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 Deluxe 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.

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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 Portfolio Anywhere module to track or share privately all of your investments from the convenience of any device.