Can any of the company-specific risk be diversified away by investing in both TSX Industrials and Rathdowney Resources 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 TSX Industrials and Rathdowney Resources into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between TSX Industrials Capped and Rathdowney Resources, you can compare the effects of market volatilities on TSX Industrials and Rathdowney Resources 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 TSX Industrials with a short position of Rathdowney Resources. Check out your portfolio center. Please also check ongoing floating volatility patterns of TSX Industrials and Rathdowney Resources.
Diversification Opportunities for TSX Industrials and Rathdowney Resources
The 3 months correlation between TSX and Rathdowney is 0.0. Overlapping area represents the amount of risk that can be diversified away by holding TSX Industrials Capped and Rathdowney Resources in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Rathdowney Resources and TSX Industrials 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 TSX Industrials Capped are associated (or correlated) with Rathdowney Resources. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Rathdowney Resources has no effect on the direction of TSX Industrials i.e., TSX Industrials and Rathdowney Resources go up and down completely randomly.
Pair Trading with TSX Industrials and Rathdowney Resources
The main advantage of trading using opposite TSX Industrials and Rathdowney Resources positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if TSX Industrials position performs unexpectedly, Rathdowney Resources 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 Rathdowney Resources will offset losses from the drop in Rathdowney Resources' long position.
The idea behind TSX Industrials Capped and Rathdowney Resources 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 Options Analysis module to analyze and evaluate options and option chains as a potential hedge for your portfolios.
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