Can any of the company-specific risk be diversified away by investing in both Nike and Getty Copper 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 Nike and Getty Copper into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Nike Inc and Getty Copper, you can compare the effects of market volatilities on Nike and Getty Copper 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 Nike with a short position of Getty Copper. Check out your portfolio center. Please also check ongoing floating volatility patterns of Nike and Getty Copper.
Diversification Opportunities for Nike and Getty Copper
The 3 months correlation between Nike and Getty is -0.2. Overlapping area represents the amount of risk that can be diversified away by holding Nike Inc and Getty Copper in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Getty Copper and Nike 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 Nike Inc are associated (or correlated) with Getty Copper. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Getty Copper has no effect on the direction of Nike i.e., Nike and Getty Copper go up and down completely randomly.
Considering the 90-day investment horizon Nike Inc is expected to generate 0.27 times more return on investment than Getty Copper. However, Nike Inc is 3.76 times less risky than Getty Copper. It trades about 0.24 of its potential returns per unit of risk. Getty Copper is currently generating about 0.03 per unit of risk. If you would invest 9,456 in Nike Inc on September 2, 2023 and sell it today you would earn a total of 1,571 from holding Nike Inc or generate 16.61% return on investment over 90 days.
Compared to the overall equity markets, risk-adjusted returns on investments in Nike Inc are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady forward-looking signals, Nike 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 Getty Copper are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak basic indicators, Getty Copper may actually be approaching a critical reversion point that can send shares even higher in January 2024.
The main advantage of trading using opposite Nike and Getty Copper positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Nike position performs unexpectedly, Getty Copper 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 Getty Copper will offset losses from the drop in Getty Copper's long position.
The idea behind Nike Inc and Getty Copper 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 Efficient Frontier module to plot and analyze your portfolio and positions against risk-return landscape of the market..
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