Correlation Between Formula Systems and Travelers Companies

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

By analyzing existing cross correlation between Formula Systems 1985 and The Travelers Companies, you can compare the effects of market volatilities on Formula Systems and Travelers Companies 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 Formula Systems with a short position of Travelers Companies. Check out your portfolio center. Please also check ongoing floating volatility patterns of Formula Systems and Travelers Companies.

Diversification Opportunities for Formula Systems and Travelers Companies

0.85

Correlation Coefficient

Formula Systems  Travelers Companies

Very poor diversification

The 3 months correlation between Formula and Travelers is 0.85. Overlapping area represents the amount of risk that can be diversified away by holding Formula Systems 1985 and The Travelers Companies in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on The Travelers Companies and Formula Systems 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 Formula Systems 1985 are associated (or correlated) with Travelers Companies. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of The Travelers Companies has no effect on the direction of Formula Systems i.e., Formula Systems and Travelers Companies go up and down completely randomly.

Pair Corralation between Formula Systems and Travelers Companies

Assuming the 90 days horizon Formula Systems 1985 is expected to under-perform the Travelers Companies. In addition to that, Formula Systems is 1.07 times more volatile than The Travelers Companies. It trades about -0.21 of its total potential returns per unit of risk. The Travelers Companies is currently generating about -0.11 per unit of volatility. If you would invest  22,553  in The Travelers Companies on January 25, 2024 and sell it today you would lose (1,121) from holding The Travelers Companies or give up 4.97% of portfolio value over 90 days.

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

Formula Systems 1985  vs.  The Travelers Companies

Formula Systems 1985

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Formula Systems 1985 are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. In spite of fairly unsteady basic indicators, Formula Systems showed solid returns over the last few months and may actually be approaching a breakup point.

The Travelers Companies

Risk-Adjusted Performance

2 of 100

Weak

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

Pair Trading with Formula Systems and Travelers Companies

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

The idea behind Formula Systems 1985 and The Travelers Companies 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 Sectors module to list of equity sectors categorizing publicly traded companies based on their primary business activities.