Correlation Between Regional Management and Advanced Drainage

Can any of the company-specific risk be diversified away by investing in both Regional Management and Advanced Drainage 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 Regional Management and Advanced Drainage into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Regional Management Corp and Advanced Drainage Systems, you can compare the effects of market volatilities on Regional Management and Advanced Drainage 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 Regional Management with a short position of Advanced Drainage. Check out your portfolio center. Please also check ongoing floating volatility patterns of Regional Management and Advanced Drainage.

Diversification Opportunities for Regional Management and Advanced Drainage

-0.36

Correlation Coefficient

Regional Management  Advanced Drainage

Very good diversification

The 3 months correlation between Regional and Advanced is -0.36. Overlapping area represents the amount of risk that can be diversified away by holding Regional Management Corp and Advanced Drainage Systems in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Advanced Drainage Systems and Regional Management 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 Regional Management Corp are associated (or correlated) with Advanced Drainage. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Advanced Drainage Systems has no effect on the direction of Regional Management i.e., Regional Management and Advanced Drainage go up and down completely randomly.

Pair Corralation between Regional Management and Advanced Drainage

Allowing for the 90-day total investment horizon Regional Management Corp is expected to generate 1.13 times more return on investment than Advanced Drainage. However, Regional Management is 1.13 times more volatile than Advanced Drainage Systems. It trades about -0.04 of its potential returns per unit of risk. Advanced Drainage Systems is currently generating about -0.36 per unit of risk. If you would invest  2,521  in Regional Management Corp on January 20, 2024 and sell it today you would lose (34.00) from holding Regional Management Corp or give up 1.35% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	95.45%
Values	Daily Returns

Regional Management Corp  vs.  Advanced Drainage Systems

Regional Management Corp

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Regional Management Corp has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy primary indicators, Regional Management is not utilizing all of its potentials. The latest stock price disarray, may contribute to short-term losses for the investors.

Advanced Drainage Systems

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Advanced Drainage Systems are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively fragile primary indicators, Advanced Drainage unveiled solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Regional Management and Advanced Drainage

The main advantage of trading using opposite Regional Management and Advanced Drainage positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Regional Management position performs unexpectedly, Advanced Drainage 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 Advanced Drainage will offset losses from the drop in Advanced Drainage's long position.

The idea behind Regional Management Corp and Advanced Drainage Systems 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.

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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 Pattern Recognition module to use different Pattern Recognition models to time the market across multiple global exchanges.