Can any of the company-specific risk be diversified away by investing in both Walmart and Global Real 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 Walmart and Global Real into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Walmart and Global Real Estate, you can compare the effects of market volatilities on Walmart and Global Real 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 Walmart with a short position of Global Real. Check out your portfolio center. Please also check ongoing floating volatility patterns of Walmart and Global Real.
Diversification Opportunities for Walmart and Global Real
The 3 months correlation between Walmart and Global is -0.05. Overlapping area represents the amount of risk that can be diversified away by holding Walmart and GLOBAL REAL ESTATE in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Global Real Estate and Walmart 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 Walmart are associated (or correlated) with Global Real. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Global Real Estate has no effect on the direction of Walmart i.e., Walmart and Global Real go up and down completely randomly.
Considering the 90-day investment horizon Walmart is expected to generate 1.12 times more return on investment than Global Real. However, Walmart is 1.12 times more volatile than Global Real Estate. It trades about 0.03 of its potential returns per unit of risk. Global Real Estate is currently generating about -0.03 per unit of risk. If you would invest 13,727 in Walmart on September 1, 2023 and sell it today you would earn a total of 1,842 from holding Walmart or generate 13.42% return on investment over 90 days.
Over the last 90 days Walmart has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of comparatively stable primary indicators, Walmart is not utilizing all of its potentials. The new stock price uproar, may contribute to short-horizon losses for the private investors.
Over the last 90 days Global Real Estate has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong technical and fundamental indicators, Global Real is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.
The main advantage of trading using opposite Walmart and Global Real positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Walmart position performs unexpectedly, Global Real 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 Global Real will offset losses from the drop in Global Real's long position.
The idea behind Walmart and Global Real Estate 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 Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.
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