Correlation Between TSX Industrials and Rathdowney Resources

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

-0.04

Correlation Coefficient

TSX Industrials  Rathdowney Resources

Good diversification

The 3 months correlation between TSX and Rathdowney is -0.04. 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 Corralation between TSX Industrials and Rathdowney Resources

Assuming the 90 days trading horizon TSX Industrials is expected to generate 6.07 times less return on investment than Rathdowney Resources. But when comparing it to its historical volatility, TSX Industrials Capped is 12.11 times less risky than Rathdowney Resources. It trades about 0.06 of its potential returns per unit of risk. Rathdowney Resources is currently generating about 0.03 of returns per unit of risk over similar time horizon. If you would invest  3.00  in Rathdowney Resources on January 25, 2024 and sell it today you would lose (2.00) from holding Rathdowney Resources or give up 66.67% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	100.0%
Values	Daily Returns

TSX Industrials Capped  vs.  Rathdowney Resources

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.

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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 Portfolio Comparator module to compare the composition, asset allocations and performance of any two portfolios in your account.