Can any of the company-specific risk be diversified away by investing in both ATT and Uber 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 ATT and Uber Technologies into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between ATT Inc and Uber Technologies, you can compare the effects of market volatilities on ATT and Uber 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 ATT with a short position of Uber Technologies. Check out your portfolio center. Please also check ongoing floating volatility patterns of ATT and Uber Technologies.
Diversification Opportunities for ATT and Uber Technologies
The 3 months correlation between ATT and Uber is 0.68. Overlapping area represents the amount of risk that can be diversified away by holding ATT Inc and Uber Technologies in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Uber Technologies and ATT 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 ATT Inc are associated (or correlated) with Uber Technologies. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Uber Technologies has no effect on the direction of ATT i.e., ATT and Uber Technologies go up and down completely randomly.
Pair Corralation between ATT and Uber Technologies
Taking into account the 90-day investment horizon ATT is expected to generate 3.32 times less return on investment than Uber Technologies. But when comparing it to its historical volatility, ATT Inc is 1.79 times less risky than Uber Technologies. It trades about 0.44 of its potential returns per unit of risk. Uber Technologies is currently generating about 0.82 of returns per unit of risk over similar time horizon. If you would invest 4,648 in Uber Technologies on September 3, 2023 and sell it today you would earn a total of 1,087 from holding Uber Technologies or generate 23.39% return on investment over 90 days.
Compared to the overall equity markets, risk-adjusted returns on investments in ATT Inc are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively weak basic indicators, ATT unveiled solid returns over the last few months and may actually be approaching a breakup point.
Compared to the overall equity markets, risk-adjusted returns on investments in Uber Technologies are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. Even with relatively uncertain technical and fundamental indicators, Uber Technologies reported solid returns over the last few months and may actually be approaching a breakup point.
The main advantage of trading using opposite ATT and Uber Technologies positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if ATT position performs unexpectedly, Uber Technologies 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 Uber Technologies will offset losses from the drop in Uber Technologies' long position.
The idea behind ATT Inc and Uber Technologies 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 Portfolio Holdings module to check your current holdings and cash postion to detemine if your portfolio needs rebalancing.
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