Correlation Between Iridium Communications and Watsco

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

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

Diversification Opportunities for Iridium Communications and Watsco

0.18

Correlation Coefficient

Iridium Communications  Watsco

Average diversification

The 3 months correlation between Iridium and Watsco is 0.18. Overlapping area represents the amount of risk that can be diversified away by holding Iridium Communications and Watsco Inc in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Watsco Inc and Iridium 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 Iridium Communications are associated (or correlated) with Watsco. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Watsco Inc has no effect on the direction of Iridium Communications i.e., Iridium Communications and Watsco go up and down completely randomly.

Pair Corralation between Iridium Communications and Watsco

Assuming the 90 days horizon Iridium Communications is expected to generate 1.71 times more return on investment than Watsco. However, Iridium Communications is 1.71 times more volatile than Watsco Inc. It trades about -0.07 of its potential returns per unit of risk. Watsco Inc is currently generating about -0.49 per unit of risk. If you would invest  2,960  in Iridium Communications on October 11, 2024 and sell it today you would lose (68.00) from holding Iridium Communications or give up 2.3% of portfolio value over 90 days.

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

Iridium Communications  vs.  Watsco Inc

Iridium Communications

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Iridium Communications are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. Despite nearly unsteady basic indicators, Iridium Communications may actually be approaching a critical reversion point that can send shares even higher in February 2025.

Watsco Inc

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Watsco Inc are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable basic indicators, Watsco is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with Iridium Communications and Watsco

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

The idea behind Iridium Communications and Watsco Inc 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 Idea Breakdown module to analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes.