Can any of the company-specific risk be diversified away by investing in both Weibo Corp and Zillow Group 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 Weibo Corp and Zillow Group into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Weibo Corp and Zillow Group Class, you can compare the effects of market volatilities on Weibo Corp and Zillow Group 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 Weibo Corp with a short position of Zillow Group. Check out your portfolio center. Please also check ongoing floating volatility patterns of Weibo Corp and Zillow Group.
Diversification Opportunities for Weibo Corp and Zillow Group
The 3 months correlation between Weibo and Zillow is 0.66. Overlapping area represents the amount of risk that can be diversified away by holding Weibo Corp and Zillow Group Class in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Zillow Group Class and Weibo Corp 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 Weibo Corp are associated (or correlated) with Zillow Group. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Zillow Group Class has no effect on the direction of Weibo Corp i.e., Weibo Corp and Zillow Group go up and down completely randomly.
Pair Corralation between Weibo Corp and Zillow Group
Allowing for the 90-day total investment horizon Weibo Corp is expected to under-perform the Zillow Group. But the stock apears to be less risky and, when comparing its historical volatility, Weibo Corp is 1.21 times less risky than Zillow Group. The stock trades about -0.06 of its potential returns per unit of risk. The Zillow Group Class is currently generating about 0.22 of returns per unit of risk over similar time horizon. If you would invest 3,625 in Zillow Group Class on September 1, 2023 and sell it today you would earn a total of 604.00 from holding Zillow Group Class or generate 16.66% return on investment over 90 days.
Over the last 90 days Weibo Corp has generated negative risk-adjusted returns adding no value to investors with long positions. Despite weak performance in the last few months, the Stock's fundamental drivers remain somewhat strong which may send shares a bit higher in December 2023. The current disturbance may also be a sign of long term up-swing for the company investors.
Over the last 90 days Zillow Group Class has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of inconsistent performance in the last few months, the Etf's basic indicators remain fairly strong which may send shares a bit higher in December 2023. The current disturbance may also be a sign of long term up-swing for the ETF investors.
The main advantage of trading using opposite Weibo Corp and Zillow Group positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Weibo Corp position performs unexpectedly, Zillow Group 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 Zillow Group will offset losses from the drop in Zillow Group's long position.
The idea behind Weibo Corp and Zillow Group Class 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 Bond Directory module to find actively traded corporate debentures issued by US companies.
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