Can any of the company-specific risk be diversified away by investing in both Unity Software and Salesforce 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 Unity Software and Salesforce into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Unity Software and Salesforce, you can compare the effects of market volatilities on Unity Software and Salesforce 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 Unity Software with a short position of Salesforce. Check out your portfolio center. Please also check ongoing floating volatility patterns of Unity Software and Salesforce.
Diversification Opportunities for Unity Software and Salesforce
The 3 months correlation between Unity and Salesforce is 0.42. Overlapping area represents the amount of risk that can be diversified away by holding Unity Software and Salesforce in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Salesforce and Unity Software 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 Unity Software are associated (or correlated) with Salesforce. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Salesforce has no effect on the direction of Unity Software i.e., Unity Software and Salesforce go up and down completely randomly.
Pair Corralation between Unity Software and Salesforce
Taking into account the 90-day investment horizon Unity Software is expected to under-perform the Salesforce. In addition to that, Unity Software is 2.26 times more volatile than Salesforce. It trades about -0.02 of its total potential returns per unit of risk. Salesforce is currently generating about 0.01 per unit of volatility. If you would invest 25,559 in Salesforce on September 5, 2023 and sell it today you would earn a total of 441.00 from holding Salesforce or generate 1.73% return on investment over 90 days.
Over the last 90 days Unity Software has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of unsteady performance in the last few months, the Stock's basic 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.
Compared to the overall equity markets, risk-adjusted returns on investments in Salesforce are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. In spite of very unsteady basic indicators, Salesforce displayed solid returns over the last few months and may actually be approaching a breakup point.
The main advantage of trading using opposite Unity Software and Salesforce positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Unity Software position performs unexpectedly, Salesforce 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 Salesforce will offset losses from the drop in Salesforce's long position.
The idea behind Unity Software and Salesforce 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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.
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