Correlation Between Automatic Data and Select Energy

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

By analyzing existing cross correlation between Automatic Data Processing and Select Energy Services, you can compare the effects of market volatilities on Automatic Data and Select Energy 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 Automatic Data with a short position of Select Energy. Check out your portfolio center. Please also check ongoing floating volatility patterns of Automatic Data and Select Energy.

Diversification Opportunities for Automatic Data and Select Energy

0.89

Correlation Coefficient

Automatic Data  Select Energy

Very poor diversification

The 3 months correlation between Automatic and Select is 0.89. Overlapping area represents the amount of risk that can be diversified away by holding Automatic Data Processing and Select Energy Services in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Select Energy Services and Automatic Data 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 Automatic Data Processing are associated (or correlated) with Select Energy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Select Energy Services has no effect on the direction of Automatic Data i.e., Automatic Data and Select Energy go up and down completely randomly.

Pair Corralation between Automatic Data and Select Energy

Assuming the 90 days horizon Automatic Data is expected to generate 1.98 times less return on investment than Select Energy. But when comparing it to its historical volatility, Automatic Data Processing is 1.93 times less risky than Select Energy. It trades about 0.05 of its potential returns per unit of risk. Select Energy Services is currently generating about 0.05 of returns per unit of risk over similar time horizon. If you would invest  784.00  in Select Energy Services on September 20, 2024 and sell it today you would earn a total of  481.00  from holding Select Energy Services or generate 61.35% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	99.8%
Values	Daily Returns

Automatic Data Processing  vs.  Select Energy Services

Automatic Data Processing

Risk-Adjusted Performance

15 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Automatic Data Processing are ranked lower than 15 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Automatic Data reported solid returns over the last few months and may actually be approaching a breakup point.

Select Energy Services

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Select Energy Services are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Select Energy reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Automatic Data and Select Energy

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

The idea behind Automatic Data Processing and Select Energy Services 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 Efficient Frontier module to plot and analyze your portfolio and positions against risk-return landscape of the market..