Correlation Between Ray and DRGEM

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

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

Diversification Opportunities for Ray and DRGEM

0.7

Correlation Coefficient

Ray  DRGEM

Poor diversification

The 3 months correlation between Ray and DRGEM is 0.7. Overlapping area represents the amount of risk that can be diversified away by holding Ray Co and DRGEM in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on DRGEM and Ray 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 Ray Co are associated (or correlated) with DRGEM. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of DRGEM has no effect on the direction of Ray i.e., Ray and DRGEM go up and down completely randomly.

Pair Corralation between Ray and DRGEM

Assuming the 90 days trading horizon Ray Co is expected to under-perform the DRGEM. In addition to that, Ray is 1.5 times more volatile than DRGEM. It trades about -0.22 of its total potential returns per unit of risk. DRGEM is currently generating about -0.21 per unit of volatility. If you would invest  832,000  in DRGEM on September 3, 2024 and sell it today you would lose (193,000) from holding DRGEM or give up 23.2% of portfolio value over 90 days.

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

Ray Co  vs.  DRGEM

Ray Co

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Ray Co has generated negative risk-adjusted returns adding no value to investors with long positions. Despite weak performance in the last few months, the Stock's basic indicators remain somewhat strong which may send shares a bit higher in January 2025. The current disturbance may also be a sign of long term up-swing for the company investors.

DRGEM

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days DRGEM has generated negative risk-adjusted returns adding no value to investors with long positions. Despite weak performance in the last few months, the Stock's basic indicators remain somewhat strong which may send shares a bit higher in January 2025. The current disturbance may also be a sign of long term up-swing for the company investors.

Pair Trading with Ray and DRGEM

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

The idea behind Ray Co and DRGEM 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 Fundamentals Comparison module to compare fundamentals across multiple equities to find investing opportunities.