Correlation Between Jeju Air and Korea Steel

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

By analyzing existing cross correlation between Jeju Air Co and Korea Steel Co, you can compare the effects of market volatilities on Jeju Air and Korea Steel 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 Jeju Air with a short position of Korea Steel. Check out your portfolio center. Please also check ongoing floating volatility patterns of Jeju Air and Korea Steel.

Diversification Opportunities for Jeju Air and Korea Steel

-0.15

Correlation Coefficient

Jeju Air  Korea Steel

Good diversification

The 3 months correlation between Jeju and Korea is -0.15. Overlapping area represents the amount of risk that can be diversified away by holding Jeju Air Co and Korea Steel Co in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Korea Steel and Jeju Air 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 Jeju Air Co are associated (or correlated) with Korea Steel. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Korea Steel has no effect on the direction of Jeju Air i.e., Jeju Air and Korea Steel go up and down completely randomly.

Pair Corralation between Jeju Air and Korea Steel

Assuming the 90 days trading horizon Jeju Air Co is expected to under-perform the Korea Steel. But the stock apears to be less risky and, when comparing its historical volatility, Jeju Air Co is 1.15 times less risky than Korea Steel. The stock trades about -0.06 of its potential returns per unit of risk. The Korea Steel Co is currently generating about 0.09 of returns per unit of risk over similar time horizon. If you would invest  149,700  in Korea Steel Co on October 1, 2024 and sell it today you would earn a total of  19,800  from holding Korea Steel Co or generate 13.23% return on investment over 90 days.

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

Jeju Air Co  vs.  Korea Steel Co

Jeju Air

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Jeju Air Co has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest weak performance, the Stock's basic indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the company investors.

Korea Steel

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Korea Steel Co are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Korea Steel sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Jeju Air and Korea Steel

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

The idea behind Jeju Air Co and Korea Steel 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.

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 Correlation Analysis module to reduce portfolio risk simply by holding instruments which are not perfectly correlated.