Correlation Between Digital Multimedia and LG Electronics

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

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

Diversification Opportunities for Digital Multimedia and LG Electronics

-0.29

Correlation Coefficient

Digital Multimedia  LG Electronics

Very good diversification

The 3 months correlation between Digital and 066575 is -0.29. Overlapping area represents the amount of risk that can be diversified away by holding Digital Multimedia Technology and LG Electronics Pfd in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on LG Electronics Pfd and Digital Multimedia 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 Multimedia Technology are associated (or correlated) with LG Electronics. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of LG Electronics Pfd has no effect on the direction of Digital Multimedia i.e., Digital Multimedia and LG Electronics go up and down completely randomly.

Pair Corralation between Digital Multimedia and LG Electronics

Assuming the 90 days trading horizon Digital Multimedia Technology is expected to generate 3.64 times more return on investment than LG Electronics. However, Digital Multimedia is 3.64 times more volatile than LG Electronics Pfd. It trades about 0.13 of its potential returns per unit of risk. LG Electronics Pfd is currently generating about -0.03 per unit of risk. If you would invest  152,900  in Digital Multimedia Technology on December 24, 2024 and sell it today you would earn a total of  47,100  from holding Digital Multimedia Technology or generate 30.8% return on investment over 90 days.

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

Digital Multimedia Technology  vs.  LG Electronics Pfd

Digital Multimedia

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Digital Multimedia Technology are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Digital Multimedia sustained solid returns over the last few months and may actually be approaching a breakup point.

LG Electronics Pfd

Risk-Adjusted Performance

Very Weak

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

Pair Trading with Digital Multimedia and LG Electronics

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

The idea behind Digital Multimedia Technology and LG Electronics Pfd 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 Idea Breakdown module to analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes.