Correlation Between Applied Opt and Lumentum Holdings

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

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

Diversification Opportunities for Applied Opt and Lumentum Holdings

0.52

Correlation Coefficient

Applied Opt  Lumentum Holdings

Very weak diversification

The 3 months correlation between Applied and Lumentum is 0.52. Overlapping area represents the amount of risk that can be diversified away by holding Applied Opt and Lumentum Holdings in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Lumentum Holdings and Applied Opt 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 Applied Opt are associated (or correlated) with Lumentum Holdings. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Lumentum Holdings has no effect on the direction of Applied Opt i.e., Applied Opt and Lumentum Holdings go up and down completely randomly.

Pair Corralation between Applied Opt and Lumentum Holdings

Given the investment horizon of 90 days Applied Opt is expected to generate 1.77 times more return on investment than Lumentum Holdings. However, Applied Opt is 1.77 times more volatile than Lumentum Holdings. It trades about -0.05 of its potential returns per unit of risk. Lumentum Holdings is currently generating about -0.13 per unit of risk. If you would invest  2,667  in Applied Opt on November 29, 2024 and sell it today you would lose (263.00) from holding Applied Opt or give up 9.86% of portfolio value over 90 days.

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

Applied Opt  vs.  Lumentum Holdings

Applied Opt

Risk-Adjusted Performance

Very Weak

Over the last 90 days Applied Opt has generated negative risk-adjusted returns adding no value to investors with long positions. Despite unsteady performance in the last few months, the Stock's basic indicators remain fairly strong which may send shares a bit higher in March 2025. The recent confusion may also be a sign of long-lasting up-swing for the firm traders.

Lumentum Holdings

Risk-Adjusted Performance

Very Weak

Over the last 90 days Lumentum Holdings has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of weak performance in the last few months, the Stock's basic indicators remain rather sound which may send shares a bit higher in March 2025. The latest tumult may also be a sign of longer-term up-swing for the firm shareholders.

Pair Trading with Applied Opt and Lumentum Holdings

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

The idea behind Applied Opt and Lumentum 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.

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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 Correlation Analysis module to reduce portfolio risk simply by holding instruments which are not perfectly correlated.