Can any of the company-specific risk be diversified away by investing in both First Advantage and LegalZoom 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 First Advantage and LegalZoom into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between First Advantage Corp and LegalZoom, you can compare the effects of market volatilities on First Advantage and LegalZoom 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 First Advantage with a short position of LegalZoom. Check out your portfolio center. Please also check ongoing floating volatility patterns of First Advantage and LegalZoom.
Diversification Opportunities for First Advantage and LegalZoom
The 3 months correlation between First and LegalZoom is 0.69. Overlapping area represents the amount of risk that can be diversified away by holding First Advantage Corp and LegalZoom in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on LegalZoom and First Advantage 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 First Advantage Corp are associated (or correlated) with LegalZoom. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of LegalZoom has no effect on the direction of First Advantage i.e., First Advantage and LegalZoom go up and down completely randomly.
Pair Corralation between First Advantage and LegalZoom
Allowing for the 90-day total investment horizon First Advantage Corp is expected to generate 0.66 times more return on investment than LegalZoom. However, First Advantage Corp is 1.53 times less risky than LegalZoom. It trades about 0.63 of its potential returns per unit of risk. LegalZoom is currently generating about 0.34 per unit of risk. If you would invest 1,309 in First Advantage Corp on September 2, 2023 and sell it today you would earn a total of 284.00 from holding First Advantage Corp or generate 21.7% return on investment over 90 days.
Compared to the overall equity markets, risk-adjusted returns on investments in First Advantage Corp are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, First Advantage may actually be approaching a critical reversion point that can send shares even higher in January 2024.
Compared to the overall equity markets, risk-adjusted returns on investments in LegalZoom are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. In spite of fairly strong basic indicators, LegalZoom is not utilizing all of its potentials. The latest stock price disturbance, may contribute to short-term losses for the investors.
The main advantage of trading using opposite First Advantage and LegalZoom positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if First Advantage position performs unexpectedly, LegalZoom 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 LegalZoom will offset losses from the drop in LegalZoom's long position.
The idea behind First Advantage Corp and LegalZoom 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 Stocks Directory module to find actively traded stocks across global markets.
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