Can any of the company-specific risk be diversified away by investing in both Oppenheimer Main and 3M 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 Oppenheimer Main and 3M into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Oppenheimer Main Street and 3M Company, you can compare the effects of market volatilities on Oppenheimer Main and 3M 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 Oppenheimer Main with a short position of 3M. Check out your portfolio center. Please also check ongoing floating volatility patterns of Oppenheimer Main and 3M.
Diversification Opportunities for Oppenheimer Main and 3M
The 3 months correlation between Oppenheimer and 3M is 0.83. Overlapping area represents the amount of risk that can be diversified away by holding Oppenheimer Main Street and 3M Company in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on 3M Company and Oppenheimer Main 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 Oppenheimer Main Street are associated (or correlated) with 3M. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of 3M Company has no effect on the direction of Oppenheimer Main i.e., Oppenheimer Main and 3M go up and down completely randomly.
Assuming the 90 days horizon Oppenheimer Main is expected to generate 3.03 times less return on investment than 3M. But when comparing it to its historical volatility, Oppenheimer Main Street is 1.1 times less risky than 3M. It trades about 0.09 of its potential returns per unit of risk. 3M Company is currently generating about 0.26 of returns per unit of risk over similar time horizon. If you would invest 8,767 in 3M Company on September 9, 2023 and sell it today you would earn a total of 1,561 from holding 3M Company or generate 17.81% return on investment over 90 days.
Compared to the overall equity markets, risk-adjusted returns on investments in Oppenheimer Main Street are ranked lower than 1 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Oppenheimer Main is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.
Over the last 90 days 3M Company has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy primary indicators, 3M is not utilizing all of its potentials. The latest stock price disarray, may contribute to short-term losses for the insiders.
The main advantage of trading using opposite Oppenheimer Main and 3M positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Oppenheimer Main position performs unexpectedly, 3M 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 3M will offset losses from the drop in 3M's long position.
The idea behind Oppenheimer Main Street and 3M Company 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 Share Portfolio module to track or share privately all of your investments from the convenience of any device.
Top statistical indicators that provide insights into how an economy is performing
Macroaxis helps investors of all levels and skills to maximize the upside of all their holdings and minimize the risk
associated with market volatility, economic swings, and company-specific events. View terms and conditions