Correlation Between Shiny Chemical and Standard Chemical

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

By analyzing existing cross correlation between Shiny Chemical Industrial and Standard Chemical Pharmaceutical, you can compare the effects of market volatilities on Shiny Chemical and Standard Chemical 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 Shiny Chemical with a short position of Standard Chemical. Check out your portfolio center. Please also check ongoing floating volatility patterns of Shiny Chemical and Standard Chemical.

Diversification Opportunities for Shiny Chemical and Standard Chemical

0.8

Correlation Coefficient

Shiny Chemical  Standard Chemical

Very poor diversification

The 3 months correlation between Shiny and Standard is 0.8. Overlapping area represents the amount of risk that can be diversified away by holding Shiny Chemical Industrial and Standard Chemical Pharmaceutic in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Standard Chemical and Shiny Chemical 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 Shiny Chemical Industrial are associated (or correlated) with Standard Chemical. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Standard Chemical has no effect on the direction of Shiny Chemical i.e., Shiny Chemical and Standard Chemical go up and down completely randomly.

Pair Corralation between Shiny Chemical and Standard Chemical

Assuming the 90 days trading horizon Shiny Chemical is expected to generate 1.0 times less return on investment than Standard Chemical. In addition to that, Shiny Chemical is 1.12 times more volatile than Standard Chemical Pharmaceutical. It trades about 0.02 of its total potential returns per unit of risk. Standard Chemical Pharmaceutical is currently generating about 0.02 per unit of volatility. If you would invest  5,370  in Standard Chemical Pharmaceutical on October 23, 2024 and sell it today you would earn a total of  720.00  from holding Standard Chemical Pharmaceutical or generate 13.41% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	99.79%
Values	Daily Returns

Shiny Chemical Industrial  vs.  Standard Chemical Pharmaceutic

Shiny Chemical Industrial

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Shiny Chemical Industrial has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest abnormal performance, the Stock's basic indicators remain stable and the latest fuss on Wall Street may also be a sign of long-term gains for the venture sophisticated investors.

Standard Chemical

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Standard Chemical Pharmaceutical has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly stable basic indicators, Standard Chemical is not utilizing all of its potentials. The current stock price fuss, may contribute to near-short-term losses for the sophisticated investors.

Pair Trading with Shiny Chemical and Standard Chemical

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

The idea behind Shiny Chemical Industrial and Standard Chemical Pharmaceutical 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 Content Syndication module to quickly integrate customizable finance content to your own investment portal.