Can any of the company-specific risk be diversified away by investing in both OShares Europe and LIFESTYLE 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 OShares Europe and LIFESTYLE into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between OShares Europe Quality and LIFESTYLE II AGGRESSIVE, you can compare the effects of market volatilities on OShares Europe and LIFESTYLE 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 OShares Europe with a short position of LIFESTYLE. Check out your portfolio center. Please also check ongoing floating volatility patterns of OShares Europe and LIFESTYLE.
Diversification Opportunities for OShares Europe and LIFESTYLE
The 3 months correlation between OShares and LIFESTYLE is 0.65. Overlapping area represents the amount of risk that can be diversified away by holding OShares Europe Quality and LIFESTYLE II AGGRESSIVE in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on LIFESTYLE II AGGRESSIVE and OShares Europe 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 OShares Europe Quality are associated (or correlated) with LIFESTYLE. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of LIFESTYLE II AGGRESSIVE has no effect on the direction of OShares Europe i.e., OShares Europe and LIFESTYLE go up and down completely randomly.
Pair Corralation between OShares Europe and LIFESTYLE
Given the investment horizon of 90 days OShares Europe is expected to generate 2.07 times less return on investment than LIFESTYLE. In addition to that, OShares Europe is 1.17 times more volatile than LIFESTYLE II AGGRESSIVE. It trades about 0.03 of its total potential returns per unit of risk. LIFESTYLE II AGGRESSIVE is currently generating about 0.08 per unit of volatility. If you would invest 1,057 in LIFESTYLE II AGGRESSIVE on June 23, 2023 and sell it today you would earn a total of 75.00 from holding LIFESTYLE II AGGRESSIVE or generate 7.1% return on investment over 90 days.
Over the last 90 days OShares Europe Quality has generated negative risk-adjusted returns adding no value to investors with long positions. Even with relatively invariable basic indicators, OShares Europe is not utilizing all of its potentials. The newest stock price agitation, may contribute to short-term losses for the retail investors.
Compared to the overall equity markets, risk-adjusted returns on investments in LIFESTYLE II AGGRESSIVE are ranked lower than 3 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, LIFESTYLE is not utilizing all of its potentials. The newest stock price disturbance, may contribute to short-term losses for the investors.
The main advantage of trading using opposite OShares Europe and LIFESTYLE positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if OShares Europe position performs unexpectedly, LIFESTYLE 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 LIFESTYLE will offset losses from the drop in LIFESTYLE's long position.
The idea behind OShares Europe Quality and LIFESTYLE II AGGRESSIVE 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 Fundamental Analysis module to view fundamental data based on most recent published financial statements.
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