Can any of the company-specific risk be diversified away by investing in both Ford and Bridge Builder 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 Ford and Bridge Builder into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Ford Motor and Bridge Builder Smallmid, you can compare the effects of market volatilities on Ford and Bridge Builder 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 Ford with a short position of Bridge Builder. Check out your portfolio center. Please also check ongoing floating volatility patterns of Ford and Bridge Builder.
Diversification Opportunities for Ford and Bridge Builder
The 3 months correlation between Ford and Bridge is 0.39. Overlapping area represents the amount of risk that can be diversified away by holding Ford Motor and Bridge Builder Smallmid in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Bridge Builder Smallmid and Ford 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 Ford Motor are associated (or correlated) with Bridge Builder. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Bridge Builder Smallmid has no effect on the direction of Ford i.e., Ford and Bridge Builder go up and down completely randomly.
Taking into account the 90-day investment horizon Ford Motor is expected to under-perform the Bridge Builder. In addition to that, Ford is 2.15 times more volatile than Bridge Builder Smallmid. It trades about -0.07 of its total potential returns per unit of risk. Bridge Builder Smallmid is currently generating about 0.03 per unit of volatility. If you would invest 1,439 in Bridge Builder Smallmid on March 6, 2024 and sell it today you would earn a total of 5.00 from holding Bridge Builder Smallmid or generate 0.35% return on investment over 90 days.
Over the last 90 days Ford Motor has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable technical and fundamental indicators, Ford is not utilizing all of its potentials. The recent stock price disturbance, may contribute to mid-run losses for the stockholders.
Compared to the overall equity markets, risk-adjusted returns on investments in Bridge Builder Smallmid are ranked lower than 2 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Bridge Builder is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.