Correlation Between Australian Dairy and Energy Resources

Can any of the company-specific risk be diversified away by investing in both Australian Dairy and Energy Resources 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 Energy Resources 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 Energy Resources, you can compare the effects of market volatilities on Australian Dairy and Energy Resources 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 Energy Resources. Check out your portfolio center. Please also check ongoing floating volatility patterns of Australian Dairy and Energy Resources.

Diversification Opportunities for Australian Dairy and Energy Resources

0.4

Correlation Coefficient

Australian Dairy  Energy Resources

Very weak diversification

The 3 months correlation between Australian and Energy is 0.4. Overlapping area represents the amount of risk that can be diversified away by holding Australian Dairy Farms and Energy Resources in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Energy Resources 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 Energy Resources. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Energy Resources has no effect on the direction of Australian Dairy i.e., Australian Dairy and Energy Resources go up and down completely randomly.

Pair Corralation between Australian Dairy and Energy Resources

Assuming the 90 days trading horizon Australian Dairy is expected to generate 1.89 times less return on investment than Energy Resources. But when comparing it to its historical volatility, Australian Dairy Farms is 2.22 times less risky than Energy Resources. It trades about 0.1 of its potential returns per unit of risk. Energy Resources is currently generating about 0.08 of returns per unit of risk over similar time horizon. If you would invest  0.20  in Energy Resources on November 29, 2024 and sell it today you would earn a total of  0.00  from holding Energy Resources or generate 0.0% return on investment over 90 days.

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

Australian Dairy Farms  vs.  Energy Resources

Australian Dairy Farms

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Australian Dairy Farms are ranked lower than 7 (%) 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.

Energy Resources

Risk-Adjusted Performance

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Energy Resources are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively uncertain basic indicators, Energy Resources unveiled solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Australian Dairy and Energy Resources

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

The idea behind Australian Dairy Farms and Energy Resources 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 Portfolio Diagnostics module to use generated alerts and portfolio events aggregator to diagnose current holdings.