Can any of the company-specific risk be diversified away by investing in both Meta Platforms and ATT 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 Meta Platforms and ATT into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Meta Platforms and ATT Inc, you can compare the effects of market volatilities on Meta Platforms and ATT 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 Meta Platforms with a short position of ATT. Check out your portfolio center. Please also check ongoing floating volatility patterns of Meta Platforms and ATT.
Diversification Opportunities for Meta Platforms and ATT
The 3 months correlation between Meta and ATT is 0.69. Overlapping area represents the amount of risk that can be diversified away by holding Meta Platforms and ATT Inc in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on ATT Inc and Meta Platforms 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 Meta Platforms are associated (or correlated) with ATT. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of ATT Inc has no effect on the direction of Meta Platforms i.e., Meta Platforms and ATT go up and down completely randomly.
Given the investment horizon of 90 days Meta Platforms is expected to generate 1.41 times less return on investment than ATT. In addition to that, Meta Platforms is 1.76 times more volatile than ATT Inc. It trades about 0.18 of its total potential returns per unit of risk. ATT Inc is currently generating about 0.44 per unit of volatility. If you would invest 1,573 in ATT Inc on September 3, 2023 and sell it today you would earn a total of 103.00 from holding ATT Inc or generate 6.55% return on investment over 90 days.
Compared to the overall equity markets, risk-adjusted returns on investments in Meta Platforms are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Despite somewhat unfluctuating basic indicators, Meta Platforms 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 ATT Inc are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively weak basic indicators, ATT unveiled solid returns over the last few months and may actually be approaching a breakup point.
The main advantage of trading using opposite Meta Platforms and ATT positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Meta Platforms position performs unexpectedly, ATT 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 ATT will offset losses from the drop in ATT's long position.
The idea behind Meta Platforms and ATT Inc 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 Alpha Finder module to use alpha and beta coefficients to find investment opportunities after accounting for the risk.
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