Correlation Between Aris Water and Melrose Industries

Can any of the company-specific risk be diversified away by investing in both Aris Water and Melrose Industries 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 Aris Water and Melrose Industries into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Aris Water Solutions and Melrose Industries PLC, you can compare the effects of market volatilities on Aris Water and Melrose Industries 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 Aris Water with a short position of Melrose Industries. Check out your portfolio center. Please also check ongoing floating volatility patterns of Aris Water and Melrose Industries.

Diversification Opportunities for Aris Water and Melrose Industries

0.86

Correlation Coefficient

Aris Water  Melrose Industries

Very poor diversification

The 3 months correlation between Aris and Melrose is 0.86. Overlapping area represents the amount of risk that can be diversified away by holding Aris Water Solutions and Melrose Industries PLC in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Melrose Industries PLC and Aris Water 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 Aris Water Solutions are associated (or correlated) with Melrose Industries. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Melrose Industries PLC has no effect on the direction of Aris Water i.e., Aris Water and Melrose Industries go up and down completely randomly.

Pair Corralation between Aris Water and Melrose Industries

Given the investment horizon of 90 days Aris Water is expected to generate 8.51 times less return on investment than Melrose Industries. But when comparing it to its historical volatility, Aris Water Solutions is 5.33 times less risky than Melrose Industries. It trades about 0.06 of its potential returns per unit of risk. Melrose Industries PLC is currently generating about 0.09 of returns per unit of risk over similar time horizon. If you would invest  354.00  in Melrose Industries PLC on October 18, 2024 and sell it today you would earn a total of  344.00  from holding Melrose Industries PLC or generate 97.18% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	72.47%
Values	Daily Returns

Aris Water Solutions  vs.  Melrose Industries PLC

Aris Water Solutions

Risk-Adjusted Performance

18 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Aris Water Solutions are ranked lower than 18 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively weak forward indicators, Aris Water unveiled solid returns over the last few months and may actually be approaching a breakup point.

Melrose Industries PLC

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Melrose Industries PLC are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Despite nearly inconsistent basic indicators, Melrose Industries reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Aris Water and Melrose Industries

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

The idea behind Aris Water Solutions and Melrose Industries PLC 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 Earnings Calls module to check upcoming earnings announcements updated hourly across public exchanges.