Correlation Between Advanced Drainage and Essentra Plc

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

By analyzing existing cross correlation between Advanced Drainage Systems and Essentra plc, you can compare the effects of market volatilities on Advanced Drainage and Essentra Plc 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 Advanced Drainage with a short position of Essentra Plc. Check out your portfolio center. Please also check ongoing floating volatility patterns of Advanced Drainage and Essentra Plc.

Diversification Opportunities for Advanced Drainage and Essentra Plc

0.51

Correlation Coefficient

Advanced Drainage  Essentra Plc

Very weak diversification

The 3 months correlation between Advanced and Essentra is 0.51. Overlapping area represents the amount of risk that can be diversified away by holding Advanced Drainage Systems and Essentra plc in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Essentra plc and Advanced Drainage 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 Advanced Drainage Systems are associated (or correlated) with Essentra Plc. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Essentra plc has no effect on the direction of Advanced Drainage i.e., Advanced Drainage and Essentra Plc go up and down completely randomly.

Pair Corralation between Advanced Drainage and Essentra Plc

Assuming the 90 days horizon Advanced Drainage Systems is expected to generate 0.87 times more return on investment than Essentra Plc. However, Advanced Drainage Systems is 1.15 times less risky than Essentra Plc. It trades about -0.04 of its potential returns per unit of risk. Essentra plc is currently generating about -0.15 per unit of risk. If you would invest  10,850  in Advanced Drainage Systems on December 28, 2024 and sell it today you would lose (590.00) from holding Advanced Drainage Systems or give up 5.44% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	98.41%
Values	Daily Returns

Advanced Drainage Systems  vs.  Essentra plc

Advanced Drainage Systems

Risk-Adjusted Performance

Very Weak

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

Essentra plc

Risk-Adjusted Performance

Very Weak

Over the last 90 days Essentra plc has generated negative risk-adjusted returns adding no value to investors with long positions. Despite fragile performance in the last few months, the Stock's basic indicators remain nearly stable which may send shares a bit higher in April 2025. The current disturbance may also be a sign of long-run up-swing for the company stockholders.

Pair Trading with Advanced Drainage and Essentra Plc

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

The idea behind Advanced Drainage Systems and Essentra plc 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 Volatility Analysis module to get historical volatility and risk analysis based on latest market data.