Correlation Between Gamma Communications and Methode Electronics

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

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

Diversification Opportunities for Gamma Communications and Methode Electronics

0.26

Correlation Coefficient

Gamma Communications  Methode Electronics

Modest diversification

The 3 months correlation between Gamma and Methode is 0.26. Overlapping area represents the amount of risk that can be diversified away by holding Gamma Communications plc and Methode Electronics in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Methode Electronics and Gamma Communications 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 Gamma Communications plc are associated (or correlated) with Methode Electronics. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Methode Electronics has no effect on the direction of Gamma Communications i.e., Gamma Communications and Methode Electronics go up and down completely randomly.

Pair Corralation between Gamma Communications and Methode Electronics

Assuming the 90 days horizon Gamma Communications plc is expected to generate 0.5 times more return on investment than Methode Electronics. However, Gamma Communications plc is 2.01 times less risky than Methode Electronics. It trades about 0.08 of its potential returns per unit of risk. Methode Electronics is currently generating about -0.02 per unit of risk. If you would invest  1,168  in Gamma Communications plc on October 5, 2024 and sell it today you would earn a total of  682.00  from holding Gamma Communications plc or generate 58.39% return on investment over 90 days.

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

Gamma Communications plc  vs.  Methode Electronics

Gamma Communications plc

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Gamma Communications plc has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest fragile performance, the Stock's basic indicators remain stable and the current disturbance on Wall Street may also be a sign of long-run gains for the company stockholders.

Methode Electronics

Risk-Adjusted Performance

0 of 100

Modest

Over the last 90 days Methode Electronics has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly fragile basic indicators, Methode Electronics reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Gamma Communications and Methode Electronics

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

The idea behind Gamma Communications plc and Methode Electronics 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 Forecasting module to use basic forecasting models to generate price predictions and determine price momentum.