Can any of the company-specific risk be diversified away by investing in both Coca Cola and ConAgra Foods 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 Coca Cola and ConAgra Foods into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between The Coca Cola and ConAgra Foods, you can compare the effects of market volatilities on Coca Cola and ConAgra Foods 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 Coca Cola with a short position of ConAgra Foods. Check out your portfolio center. Please also check ongoing floating volatility patterns of Coca Cola and ConAgra Foods.
Diversification Opportunities for Coca Cola and ConAgra Foods
The 3 months correlation between Coca and ConAgra is 0.86. Overlapping area represents the amount of risk that can be diversified away by holding The Coca-Cola and ConAgra Foods in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on ConAgra Foods and Coca Cola 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 The Coca Cola are associated (or correlated) with ConAgra Foods. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of ConAgra Foods has no effect on the direction of Coca Cola i.e., Coca Cola and ConAgra Foods go up and down completely randomly.
Pair Corralation between Coca Cola and ConAgra Foods
Allowing for the 90-day total investment horizon The Coca Cola is expected to generate 0.67 times more return on investment than ConAgra Foods. However, The Coca Cola is 1.49 times less risky than ConAgra Foods. It trades about 0.4 of its potential returns per unit of risk. ConAgra Foods is currently generating about 0.25 per unit of risk. If you would invest 5,652 in The Coca Cola on September 5, 2023 and sell it today you would earn a total of 212.00 from holding The Coca Cola or generate 3.75% return on investment over 90 days.
Compared to the overall equity markets, risk-adjusted returns on investments in The Coca Cola are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy basic indicators, Coca Cola is not utilizing all of its potentials. The latest stock price disarray, may contribute to short-term losses for the insiders.
Over the last 90 days ConAgra Foods has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable basic indicators, ConAgra Foods is not utilizing all of its potentials. The latest stock price disturbance, may contribute to mid-run losses for the stockholders.
The main advantage of trading using opposite Coca Cola and ConAgra Foods positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Coca Cola position performs unexpectedly, ConAgra Foods 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 ConAgra Foods will offset losses from the drop in ConAgra Foods' long position.
The idea behind The Coca Cola and ConAgra Foods 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 Balance Of Power module to check stock momentum by analyzing Balance Of Power indicator and other technical ratios.
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