Can any of the company-specific risk be diversified away by investing in both Zimplats Holdings and Eastfield Resources 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 Zimplats Holdings and Eastfield Resources into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Zimplats Holdings Limited and Eastfield Resources, you can compare the effects of market volatilities on Zimplats Holdings and Eastfield Resources 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 Zimplats Holdings with a short position of Eastfield Resources. Check out your portfolio center. Please also check ongoing floating volatility patterns of Zimplats Holdings and Eastfield Resources.
Diversification Opportunities for Zimplats Holdings and Eastfield Resources
The 3 months correlation between Zimplats and Eastfield is 0.46. Overlapping area represents the amount of risk that can be diversified away by holding Zimplats Holdings Limited and Eastfield Resources in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Eastfield Resources and Zimplats Holdings 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 Zimplats Holdings Limited are associated (or correlated) with Eastfield Resources. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Eastfield Resources has no effect on the direction of Zimplats Holdings i.e., Zimplats Holdings and Eastfield Resources go up and down completely randomly.
Pair Corralation between Zimplats Holdings and Eastfield Resources
Assuming the 90 days horizon Zimplats Holdings is expected to generate 16.61 times less return on investment than Eastfield Resources. But when comparing it to its historical volatility, Zimplats Holdings Limited is 4.01 times less risky than Eastfield Resources. It trades about 0.01 of its potential returns per unit of risk. Eastfield Resources is currently generating about 0.03 of returns per unit of risk over similar time horizon. If you would invest 6.70 in Eastfield Resources on September 5, 2023 and sell it today you would lose (4.80) from holding Eastfield Resources or give up 71.64% of portfolio value over 90 days.
Over the last 90 days Zimplats Holdings Limited has generated negative risk-adjusted returns adding no value to investors with long positions. Despite fragile performance in the last few months, the Stock's essential indicators remain nearly stable which may send shares a bit higher in January 2024. The current disturbance may also be a sign of long-run up-swing for the company stockholders.
Compared to the overall equity markets, risk-adjusted returns on investments in Eastfield Resources are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile essential indicators, Eastfield Resources reported solid returns over the last few months and may actually be approaching a breakup point.
Zimplats Holdings and Eastfield Resources Volatility Contrast
Predicted Return Density
Pair Trading with Zimplats Holdings and Eastfield Resources
The main advantage of trading using opposite Zimplats Holdings and Eastfield Resources positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Zimplats Holdings position performs unexpectedly, Eastfield Resources 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 Eastfield Resources will offset losses from the drop in Eastfield Resources' long position.
The idea behind Zimplats Holdings Limited and Eastfield Resources 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 Bonds Directory module to find actively traded corporate debentures issued by US companies.
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