Correlation Between System and Digital Power

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

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

Diversification Opportunities for System and Digital Power

0.21

Correlation Coefficient

System  Digital Power

Modest diversification

The 3 months correlation between System and Digital is 0.21. Overlapping area represents the amount of risk that can be diversified away by holding System and Application and Digital Power Communications in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Digital Power Commun and System 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 System and Application are associated (or correlated) with Digital Power. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Digital Power Commun has no effect on the direction of System i.e., System and Digital Power go up and down completely randomly.

Pair Corralation between System and Digital Power

Assuming the 90 days trading horizon System and Application is expected to generate 0.97 times more return on investment than Digital Power. However, System and Application is 1.03 times less risky than Digital Power. It trades about 0.01 of its potential returns per unit of risk. Digital Power Communications is currently generating about -0.02 per unit of risk. If you would invest  147,500  in System and Application on December 25, 2024 and sell it today you would lose (300.00) from holding System and Application or give up 0.2% of portfolio value over 90 days.

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

System and Application  vs.  Digital Power Communications

System and Application

Risk-Adjusted Performance

Weak

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

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.

Pair Trading with System and Digital Power

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

The idea behind System and Application and Digital Power Communications 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 Global Correlations module to find global opportunities by holding instruments from different markets.