Correlation Between Xylem and Quanta Services

Can any of the company-specific risk be diversified away by investing in both Xylem and Quanta Services 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 Xylem and Quanta Services into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Xylem Inc and Quanta Services, you can compare the effects of market volatilities on Xylem and Quanta Services 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 Xylem with a short position of Quanta Services. Check out your portfolio center. Please also check ongoing floating volatility patterns of Xylem and Quanta Services.

Diversification Opportunities for Xylem and Quanta Services

0.9

Correlation Coefficient

Xylem  Quanta Services

Almost no diversification

The 3 months correlation between Xylem and Quanta is 0.9. Overlapping area represents the amount of risk that can be diversified away by holding Xylem Inc and Quanta Services in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Quanta Services and Xylem 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 Xylem Inc are associated (or correlated) with Quanta Services. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Quanta Services has no effect on the direction of Xylem i.e., Xylem and Quanta Services go up and down completely randomly.

Pair Corralation between Xylem and Quanta Services

Considering the 90-day investment horizon Xylem is expected to generate 6.62 times less return on investment than Quanta Services. But when comparing it to its historical volatility, Xylem Inc is 2.63 times less risky than Quanta Services. It trades about 0.08 of its potential returns per unit of risk. Quanta Services is currently generating about 0.2 of returns per unit of risk over similar time horizon. If you would invest  20,913  in Quanta Services on January 20, 2024 and sell it today you would earn a total of  3,655  from holding Quanta Services or generate 17.48% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Strong
Accuracy	100.0%
Values	Daily Returns

Xylem Inc  vs.  Quanta Services

Xylem Inc

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Xylem Inc are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. Despite quite weak basic indicators, Xylem may actually be approaching a critical reversion point that can send shares even higher in May 2024.

Quanta Services

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Quanta Services are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. Even with relatively unsteady basic indicators, Quanta Services reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Xylem and Quanta Services

The main advantage of trading using opposite Xylem and Quanta Services positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Xylem position performs unexpectedly, Quanta Services 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 Quanta Services will offset losses from the drop in Quanta Services' long position.

The idea behind Xylem Inc and Quanta Services 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.

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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 Money Flow Index module to determine momentum by analyzing Money Flow Index and other technical indicators.