Correlation Between Tile Shop and Wesfarmers

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

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

Diversification Opportunities for Tile Shop and Wesfarmers

0.27

Correlation Coefficient

Tile Shop  Wesfarmers

Modest diversification

The 3 months correlation between Tile and Wesfarmers is 0.27. Overlapping area represents the amount of risk that can be diversified away by holding Tile Shop Holdings and Wesfarmers Limited in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Wesfarmers Limited and Tile Shop 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 Tile Shop Holdings are associated (or correlated) with Wesfarmers. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Wesfarmers Limited has no effect on the direction of Tile Shop i.e., Tile Shop and Wesfarmers go up and down completely randomly.

Pair Corralation between Tile Shop and Wesfarmers

Assuming the 90 days horizon Tile Shop Holdings is expected to generate 1.43 times more return on investment than Wesfarmers. However, Tile Shop is 1.43 times more volatile than Wesfarmers Limited. It trades about 0.11 of its potential returns per unit of risk. Wesfarmers Limited is currently generating about -0.03 per unit of risk. If you would invest  575.00  in Tile Shop Holdings on September 22, 2024 and sell it today you would earn a total of  85.00  from holding Tile Shop Holdings or generate 14.78% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	98.48%
Values	Daily Returns

Tile Shop Holdings  vs.  Wesfarmers Limited

Tile Shop Holdings

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Tile Shop Holdings are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Tile Shop reported solid returns over the last few months and may actually be approaching a breakup point.

Wesfarmers Limited

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Wesfarmers Limited has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable basic indicators, Wesfarmers is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with Tile Shop and Wesfarmers

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

The idea behind Tile Shop Holdings and Wesfarmers Limited 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 Equity Search module to search for actively traded equities including funds and ETFs from over 30 global markets.