Can any of the company-specific risk be diversified away by investing in both International Business and Hartford Total 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 International Business and Hartford Total into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between International Business Machines and Hartford Total Return, you can compare the effects of market volatilities on International Business and Hartford Total 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 International Business with a short position of Hartford Total. Check out your portfolio center. Please also check ongoing floating volatility patterns of International Business and Hartford Total.
Diversification Opportunities for International Business and Hartford Total
The 3 months correlation between International and Hartford is 0.87. Overlapping area represents the amount of risk that can be diversified away by holding International Business Machine and Hartford Total Return in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Hartford Total Return and International Business 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 International Business Machines are associated (or correlated) with Hartford Total. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Hartford Total Return has no effect on the direction of International Business i.e., International Business and Hartford Total go up and down completely randomly.
Pair Corralation between International Business and Hartford Total
Considering the 90-day investment horizon International Business Machines is expected to generate 2.13 times more return on investment than Hartford Total. However, International Business is 2.13 times more volatile than Hartford Total Return. It trades about 0.06 of its potential returns per unit of risk. Hartford Total Return is currently generating about 0.02 per unit of risk. If you would invest 14,009 in International Business Machines on September 5, 2023 and sell it today you would earn a total of 2,090 from holding International Business Machines or generate 14.92% return on investment over 90 days.
Compared to the overall equity markets, risk-adjusted returns on investments in International Business Machines are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. In spite of very fragile fundamental drivers, International Business 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 Hartford Total Return are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Despite somewhat strong basic indicators, Hartford Total is not utilizing all of its potentials. The latest stock price disturbance, may contribute to short-term losses for the investors.
International Business and Hartford Total Volatility Contrast
Predicted Return Density
Pair Trading with International Business and Hartford Total
The main advantage of trading using opposite International Business and Hartford Total positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if International Business position performs unexpectedly, Hartford Total 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 Hartford Total will offset losses from the drop in Hartford Total's long position.
The idea behind International Business Machines and Hartford Total Return 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 Headlines Timeline module to stay connected to all market stories and filter out noise. Drill down to analyze hype elasticity.
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