Correlation Between Digital Power and LG Chem

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

By analyzing existing cross correlation between Digital Power Communications and LG Chem, you can compare the effects of market volatilities on Digital Power and LG Chem 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 Digital Power with a short position of LG Chem. Check out your portfolio center. Please also check ongoing floating volatility patterns of Digital Power and LG Chem.

Diversification Opportunities for Digital Power and LG Chem

0.65

Correlation Coefficient

Digital Power  LG Chem

Poor diversification

The 3 months correlation between Digital and 051915 is 0.65. Overlapping area represents the amount of risk that can be diversified away by holding Digital Power Communications and LG Chem in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on LG Chem and Digital Power 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 Digital Power Communications are associated (or correlated) with LG Chem. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of LG Chem has no effect on the direction of Digital Power i.e., Digital Power and LG Chem go up and down completely randomly.

Pair Corralation between Digital Power and LG Chem

Assuming the 90 days trading horizon Digital Power Communications is expected to generate 0.75 times more return on investment than LG Chem. However, Digital Power Communications is 1.33 times less risky than LG Chem. It trades about -0.02 of its potential returns per unit of risk. LG Chem is currently generating about -0.15 per unit of risk. If you would invest  867,000  in Digital Power Communications on December 25, 2024 and sell it today you would lose (28,000) from holding Digital Power Communications or give up 3.23% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	98.25%
Values	Daily Returns

Digital Power Communications  vs.  LG Chem

Digital Power Commun

Risk-Adjusted Performance

Very Weak

Over the last 90 days Digital Power Communications has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong basic indicators, Digital Power is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

LG Chem

Risk-Adjusted Performance

Very Weak

Over the last 90 days LG Chem has generated negative risk-adjusted returns adding no value to investors with long positions. Despite weak performance in the last few months, the Stock's basic indicators remain somewhat strong which may send shares a bit higher in April 2025. The current disturbance may also be a sign of long term up-swing for the company investors.

Pair Trading with Digital Power and LG Chem

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

The idea behind Digital Power Communications and LG Chem 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 Fundamental Analysis module to view fundamental data based on most recent published financial statements.