Can any of the company-specific risk be diversified away by investing in both Exxon 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 Exxon and Salesforce into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Exxon Mobil Corp and Salesforce, you can compare the effects of market volatilities on Exxon 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 Exxon with a short position of Salesforce. Check out your portfolio center. Please also check ongoing floating volatility patterns of Exxon and Salesforce.
Diversification Opportunities for Exxon and Salesforce
The 3 months correlation between Exxon and Salesforce is -0.33. Overlapping area represents the amount of risk that can be diversified away by holding Exxon Mobil Corp and Salesforce in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Salesforce and Exxon 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 Exxon Mobil Corp 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 Exxon i.e., Exxon and Salesforce go up and down completely randomly.
Considering the 90-day investment horizon Exxon Mobil Corp is expected to under-perform the Salesforce. But the stock apears to be less risky and, when comparing its historical volatility, Exxon Mobil Corp is 1.19 times less risky than Salesforce. The stock trades about 0.0 of its potential returns per unit of risk. The Salesforce is currently generating about 0.15 of returns per unit of risk over similar time horizon. If you would invest 13,311 in Salesforce on September 7, 2023 and sell it today you would earn a total of 11,791 from holding Salesforce or generate 88.58% return on investment over 90 days.
Over the last 90 days Exxon Mobil Corp has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest sluggish performance, the Stock's basic indicators remain healthy and the recent disarray on Wall Street may also be a sign of long period gains for the firm insiders.
Compared to the overall equity markets, risk-adjusted returns on investments in Salesforce are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of very conflicting basic indicators, Salesforce may actually be approaching a critical reversion point that can send shares even higher in January 2024.
The main advantage of trading using opposite Exxon and Salesforce positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Exxon 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 Exxon Mobil Corp 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 Stock Tickers module to use high-impact, comprehensive, and customizable stock tickers that can be easily integrated to any websites.
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