Correlation Between SP Merval and Agrometal

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

By analyzing existing cross correlation between SP Merval and Agrometal, you can compare the effects of market volatilities on SP Merval and Agrometal 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 SP Merval with a short position of Agrometal. Check out your portfolio center. Please also check ongoing floating volatility patterns of SP Merval and Agrometal.

Diversification Opportunities for SP Merval and Agrometal

0.9

Correlation Coefficient

SP Merval Agrometal

Almost no diversification

The 3 months correlation between MERV and Agrometal is 0.9. Overlapping area represents the amount of risk that can be diversified away by holding SP Merval and Agrometal in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Agrometal and SP Merval 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 SP Merval are associated (or correlated) with Agrometal. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Agrometal has no effect on the direction of SP Merval i.e., SP Merval and Agrometal go up and down completely randomly.

Pair Corralation between SP Merval and Agrometal

Assuming the 90 days trading horizon SP Merval is expected to generate 1.35 times less return on investment than Agrometal. But when comparing it to its historical volatility, SP Merval is 1.86 times less risky than Agrometal. It trades about 0.7 of its potential returns per unit of risk. Agrometal is currently generating about 0.51 of returns per unit of risk over similar time horizon. If you would invest  7,380  in Agrometal on March 6, 2023 and sell it today you would earn a total of  1,900  from holding Agrometal or generate 25.75% return on investment over 90 days.

SP Merval  vs.  Agrometal

Pair Trading with SP Merval and Agrometal

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

The idea behind SP Merval and Agrometal 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 CEO Directory module to screen CEOs from public companies around the world.