Correlation Between Align Technology and LPL Financial

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

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

Diversification Opportunities for Align Technology and LPL Financial

0.48

Correlation Coefficient

Align Technology  LPL Financial

Very weak diversification

The 3 months correlation between Align and LPL is 0.48. Overlapping area represents the amount of risk that can be diversified away by holding Align Technology and LPL Financial Holdings in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on LPL Financial Holdings and Align Technology 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 Align Technology are associated (or correlated) with LPL Financial. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of LPL Financial Holdings has no effect on the direction of Align Technology i.e., Align Technology and LPL Financial go up and down completely randomly.

Pair Corralation between Align Technology and LPL Financial

Assuming the 90 days trading horizon Align Technology is expected to under-perform the LPL Financial. But the stock apears to be less risky and, when comparing its historical volatility, Align Technology is 1.18 times less risky than LPL Financial. The stock trades about -0.01 of its potential returns per unit of risk. The LPL Financial Holdings is currently generating about 0.37 of returns per unit of risk over similar time horizon. If you would invest  7,331  in LPL Financial Holdings on October 6, 2024 and sell it today you would earn a total of  4,115  from holding LPL Financial Holdings or generate 56.13% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	98.31%
Values	Daily Returns

Align Technology  vs.  LPL Financial Holdings

Align Technology

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Align Technology has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong essential indicators, Align Technology is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

LPL Financial Holdings

Risk-Adjusted Performance

28 of 100

Strong

Compared to the overall equity markets, risk-adjusted returns on investments in LPL Financial Holdings are ranked lower than 28 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, LPL Financial sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Align Technology and LPL Financial

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

The idea behind Align Technology and LPL Financial Holdings 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.

Check out your portfolio center.

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 Portfolio Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.