Correlation Between System and TL

Can any of the company-specific risk be diversified away by investing in both System and TL 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 TL 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 TL Co, you can compare the effects of market volatilities on System and TL 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 TL. Check out your portfolio center. Please also check ongoing floating volatility patterns of System and TL.

Diversification Opportunities for System and TL

-0.22

Correlation Coefficient

System  TL

Very good diversification

The 3 months correlation between System and TL is -0.22. Overlapping area represents the amount of risk that can be diversified away by holding System and Application and TL Co in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on TL Co 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 TL. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of TL Co has no effect on the direction of System i.e., System and TL go up and down completely randomly.

Pair Corralation between System and TL

Assuming the 90 days trading horizon System and Application is expected to under-perform the TL. But the stock apears to be less risky and, when comparing its historical volatility, System and Application is 1.66 times less risky than TL. The stock trades about -0.04 of its potential returns per unit of risk. The TL Co is currently generating about 0.09 of returns per unit of risk over similar time horizon. If you would invest  6,690,000  in TL Co on December 30, 2024 and sell it today you would earn a total of  990,000  from holding TL Co or generate 14.8% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	100.0%
Values	Daily Returns

System and Application  vs.  TL Co

System and Application

Risk-Adjusted Performance

Very 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.

TL Co

Risk-Adjusted Performance

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in TL Co are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, TL sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with System and TL

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

The idea behind System and Application and TL Co 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 Stock Tickers module to use high-impact, comprehensive, and customizable stock tickers that can be easily integrated to any websites.