Can any of the company-specific risk be diversified away by investing in both Dow Jones and Sensient Technologies 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 Dow Jones and Sensient Technologies into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Dow Jones Toys and Sensient Technologies, you can compare the effects of market volatilities on Dow Jones and Sensient Technologies 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 Dow Jones with a short position of Sensient Technologies. Check out your portfolio center. Please also check ongoing floating volatility patterns of Dow Jones and Sensient Technologies.
Diversification Opportunities for Dow Jones and Sensient Technologies
The 3 months correlation between Dow and Sensient is 0.81. Overlapping area represents the amount of risk that can be diversified away by holding Dow Jones Toys and Sensient Technologies in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Sensient Technologies and Dow Jones 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 Dow Jones Toys are associated (or correlated) with Sensient Technologies. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Sensient Technologies has no effect on the direction of Dow Jones i.e., Dow Jones and Sensient Technologies go up and down completely randomly.
Pair Corralation between Dow Jones and Sensient Technologies
Assuming the 90 days horizon Dow Jones is expected to generate 2.47 times less return on investment than Sensient Technologies. But when comparing it to its historical volatility, Dow Jones Toys is 3.79 times less risky than Sensient Technologies. It trades about 0.15 of its potential returns per unit of risk. Sensient Technologies is currently generating about 0.1 of returns per unit of risk over similar time horizon. If you would invest 7,499 in Sensient Technologies on March 6, 2024 and sell it today you would earn a total of 155.00 from holding Sensient Technologies or generate 2.07% return on investment over 90 days.
Compared to the overall equity markets, risk-adjusted returns on investments in Dow Jones Toys are ranked lower than 15 (%) of all global equities and portfolios over the last 90 days. In spite of very unfluctuating basic indicators, Dow Jones may actually be approaching a critical reversion point that can send shares even higher in July 2024.
Compared to the overall equity markets, risk-adjusted returns on investments in Sensient Technologies are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively unsteady basic indicators, Sensient Technologies unveiled solid returns over the last few months and may actually be approaching a breakup point.