Can any of the company-specific risk be diversified away by investing in both SohuCom and Chevron Corp 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 SohuCom and Chevron Corp into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between SohuCom and Chevron Corp, you can compare the effects of market volatilities on SohuCom and Chevron Corp 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 SohuCom with a short position of Chevron Corp. Check out your portfolio center. Please also check ongoing floating volatility patterns of SohuCom and Chevron Corp.
Diversification Opportunities for SohuCom and Chevron Corp
The 3 months correlation between SohuCom and Chevron is 0.54. Overlapping area represents the amount of risk that can be diversified away by holding SohuCom and Chevron Corp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Chevron Corp and SohuCom 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 SohuCom are associated (or correlated) with Chevron Corp. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Chevron Corp has no effect on the direction of SohuCom i.e., SohuCom and Chevron Corp go up and down completely randomly.
Given the investment horizon of 90 days SohuCom is expected to generate 5.02 times more return on investment than Chevron Corp. However, SohuCom is 5.02 times more volatile than Chevron Corp. It trades about -0.01 of its potential returns per unit of risk. Chevron Corp is currently generating about -0.08 per unit of risk. If you would invest 841.00 in SohuCom on September 3, 2023 and sell it today you would lose (27.00) from holding SohuCom or give up 3.21% of portfolio value over 90 days.
Over the last 90 days SohuCom has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of uncertain performance in the last few months, the Stock's technical indicators remain comparatively stable which may send shares a bit higher in January 2024. The newest uproar may also be a sign of mid-term up-swing for the firm private investors.
Over the last 90 days Chevron Corp has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest unsteady performance, the Stock's basic indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the company investors.
The main advantage of trading using opposite SohuCom and Chevron Corp positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if SohuCom position performs unexpectedly, Chevron Corp 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 Chevron Corp will offset losses from the drop in Chevron Corp's long position.
The idea behind SohuCom and Chevron Corp 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 USA ETFs module to find actively traded Exchange Traded Funds (ETF) in USA.
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