Correlation Between Darfon Electronics and Forest Water

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

By analyzing existing cross correlation between Darfon Electronics Corp and Forest Water Environmental, you can compare the effects of market volatilities on Darfon Electronics and Forest Water 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 Darfon Electronics with a short position of Forest Water. Check out your portfolio center. Please also check ongoing floating volatility patterns of Darfon Electronics and Forest Water.

Diversification Opportunities for Darfon Electronics and Forest Water

0.57

Correlation Coefficient

Darfon Electronics  Forest Water

Very weak diversification

The 3 months correlation between Darfon and Forest is 0.57. Overlapping area represents the amount of risk that can be diversified away by holding Darfon Electronics Corp and Forest Water Environmental in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Forest Water Environ and Darfon Electronics 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 Darfon Electronics Corp are associated (or correlated) with Forest Water. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Forest Water Environ has no effect on the direction of Darfon Electronics i.e., Darfon Electronics and Forest Water go up and down completely randomly.

Pair Corralation between Darfon Electronics and Forest Water

Assuming the 90 days trading horizon Darfon Electronics Corp is expected to generate 0.86 times more return on investment than Forest Water. However, Darfon Electronics Corp is 1.17 times less risky than Forest Water. It trades about -0.05 of its potential returns per unit of risk. Forest Water Environmental is currently generating about -0.06 per unit of risk. If you would invest  4,375  in Darfon Electronics Corp on December 23, 2024 and sell it today you would lose (175.00) from holding Darfon Electronics Corp or give up 4.0% of portfolio value over 90 days.

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

Darfon Electronics Corp  vs.  Forest Water Environmental

Darfon Electronics Corp

Risk-Adjusted Performance

Very Weak

Over the last 90 days Darfon Electronics Corp has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly stable basic indicators, Darfon Electronics is not utilizing all of its potentials. The latest stock price fuss, may contribute to near-short-term losses for the sophisticated investors.

Forest Water Environ

Risk-Adjusted Performance

Very Weak

Over the last 90 days Forest Water Environmental has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly stable basic indicators, Forest Water is not utilizing all of its potentials. The latest stock price fuss, may contribute to near-short-term losses for the sophisticated investors.

Pair Trading with Darfon Electronics and Forest Water

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

The idea behind Darfon Electronics Corp and Forest Water Environmental 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 Global Correlations module to find global opportunities by holding instruments from different markets.