Correlation Between Broadcom and WW Grainger

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

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

Diversification Opportunities for Broadcom and WW Grainger

-0.36

Correlation Coefficient

Broadcom  WW Grainger

Very good diversification

The 3 months correlation between Broadcom and GWW is -0.36. Overlapping area represents the amount of risk that can be diversified away by holding Broadcom and WW Grainger in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on WW Grainger and Broadcom 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 Broadcom are associated (or correlated) with WW Grainger. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of WW Grainger has no effect on the direction of Broadcom i.e., Broadcom and WW Grainger go up and down completely randomly.

Pair Corralation between Broadcom and WW Grainger

Assuming the 90 days trading horizon Broadcom is expected to generate 2.58 times more return on investment than WW Grainger. However, Broadcom is 2.58 times more volatile than WW Grainger. It trades about 0.18 of its potential returns per unit of risk. WW Grainger is currently generating about 0.09 per unit of risk. If you would invest  16,124  in Broadcom on October 25, 2024 and sell it today you would earn a total of  7,466  from holding Broadcom or generate 46.3% return on investment over 90 days.

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

Broadcom  vs.  WW Grainger

Broadcom

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Broadcom are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively uncertain fundamental indicators, Broadcom unveiled solid returns over the last few months and may actually be approaching a breakup point.

WW Grainger

Risk-Adjusted Performance

7 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in WW Grainger are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, WW Grainger may actually be approaching a critical reversion point that can send shares even higher in February 2025.

Pair Trading with Broadcom and WW Grainger

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

The idea behind Broadcom and WW Grainger 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 Portfolio Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.