Correlation Between Encore Wire and Acuity Brands

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Can any of the company-specific risk be diversified away by investing in both Encore Wire and Acuity Brands 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 Encore Wire and Acuity Brands into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Encore Wire and Acuity Brands, you can compare the effects of market volatilities on Encore Wire and Acuity Brands 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 Encore Wire with a short position of Acuity Brands. Check out your portfolio center. Please also check ongoing floating volatility patterns of Encore Wire and Acuity Brands.

Diversification Opportunities for Encore Wire and Acuity Brands

0.87
  Correlation Coefficient

Very poor diversification

The 3 months correlation between Encore and Acuity is 0.87. Overlapping area represents the amount of risk that can be diversified away by holding Encore Wire and Acuity Brands in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Acuity Brands and Encore Wire 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 Encore Wire are associated (or correlated) with Acuity Brands. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Acuity Brands has no effect on the direction of Encore Wire i.e., Encore Wire and Acuity Brands go up and down completely randomly.

Pair Corralation between Encore Wire and Acuity Brands

Given the investment horizon of 90 days Encore Wire is expected to generate 1.8 times more return on investment than Acuity Brands. However, Encore Wire is 1.8 times more volatile than Acuity Brands. It trades about 0.1 of its potential returns per unit of risk. Acuity Brands is currently generating about 0.13 per unit of risk. If you would invest  22,114  in Encore Wire on November 30, 2023 and sell it today you would earn a total of  1,024  from holding Encore Wire or generate 4.63% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthStrong
Accuracy100.0%
ValuesDaily Returns

Encore Wire  vs.  Acuity Brands

 Performance 
       Timeline  
Encore Wire 

Risk-Adjusted Performance

17 of 100

 
Low
 
High
Solid
Compared to the overall equity markets, risk-adjusted returns on investments in Encore Wire are ranked lower than 17 (%) of all global equities and portfolios over the last 90 days. In spite of rather conflicting basic indicators, Encore Wire exhibited solid returns over the last few months and may actually be approaching a breakup point.
Acuity Brands 

Risk-Adjusted Performance

22 of 100

 
Low
 
High
Solid
Compared to the overall equity markets, risk-adjusted returns on investments in Acuity Brands are ranked lower than 22 (%) of all global equities and portfolios over the last 90 days. Despite fairly weak basic indicators, Acuity Brands demonstrated solid returns over the last few months and may actually be approaching a breakup point.

Encore Wire and Acuity Brands Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Encore Wire and Acuity Brands

The main advantage of trading using opposite Encore Wire and Acuity Brands positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Encore Wire position performs unexpectedly, Acuity Brands 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 Acuity Brands will offset losses from the drop in Acuity Brands' long position.
The idea behind Encore Wire and Acuity Brands 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 Comparator module to compare the composition, asset allocations and performance of any two portfolios in your account.

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