Correlation Between Australian Dairy and Emperor Energy

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

By analyzing existing cross correlation between Australian Dairy Farms and Emperor Energy, you can compare the effects of market volatilities on Australian Dairy and Emperor 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 Australian Dairy with a short position of Emperor Energy. Check out your portfolio center. Please also check ongoing floating volatility patterns of Australian Dairy and Emperor Energy.

Diversification Opportunities for Australian Dairy and Emperor Energy

0.74

Correlation Coefficient

Australian Dairy  Emperor Energy

Poor diversification

The 3 months correlation between Australian and Emperor is 0.74. Overlapping area represents the amount of risk that can be diversified away by holding Australian Dairy Farms and Emperor Energy in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Emperor Energy and Australian Dairy 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 Australian Dairy Farms are associated (or correlated) with Emperor Energy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Emperor Energy has no effect on the direction of Australian Dairy i.e., Australian Dairy and Emperor Energy go up and down completely randomly.

Pair Corralation between Australian Dairy and Emperor Energy

Assuming the 90 days trading horizon Australian Dairy Farms is expected to generate 0.77 times more return on investment than Emperor Energy. However, Australian Dairy Farms is 1.31 times less risky than Emperor Energy. It trades about 0.16 of its potential returns per unit of risk. Emperor Energy is currently generating about 0.11 per unit of risk. If you would invest  2.20  in Australian Dairy Farms on September 30, 2024 and sell it today you would earn a total of  4.50  from holding Australian Dairy Farms or generate 204.55% return on investment over 90 days.

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

Australian Dairy Farms  vs.  Emperor Energy

Australian Dairy Farms

Risk-Adjusted Performance

24 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Australian Dairy Farms are ranked lower than 24 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively uncertain technical and fundamental indicators, Australian Dairy unveiled solid returns over the last few months and may actually be approaching a breakup point.

Emperor Energy

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Emperor Energy are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively uncertain basic indicators, Emperor Energy unveiled solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Australian Dairy and Emperor Energy

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

The idea behind Australian Dairy Farms and Emperor Energy 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.