Correlation Between ARK and LSK

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

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

Diversification Opportunities for ARK and LSK

0.84

Correlation Coefficient

ARK  LSK

Very poor diversification

The 3 months correlation between ARK and LSK is 0.84. Overlapping area represents the amount of risk that can be diversified away by holding ARK and LSK in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on LSK and ARK 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 ARK are associated (or correlated) with LSK. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of LSK has no effect on the direction of ARK i.e., ARK and LSK go up and down completely randomly.

Pair Corralation between ARK and LSK

Assuming the 90 days trading horizon ARK is expected to generate 1.85 times more return on investment than LSK. However, ARK is 1.85 times more volatile than LSK. It trades about 0.06 of its potential returns per unit of risk. LSK is currently generating about 0.04 per unit of risk. If you would invest  24.00  in ARK on September 25, 2024 and sell it today you would earn a total of  30.00  from holding ARK or generate 125.0% return on investment over 90 days.

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

ARK  vs.  LSK

ARK

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in ARK are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady forward-looking signals, ARK exhibited solid returns over the last few months and may actually be approaching a breakup point.

LSK

Risk-Adjusted Performance

2 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in LSK are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady forward-looking signals, LSK may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with ARK and LSK

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

The idea behind ARK and LSK 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 Aroon Oscillator module to analyze current equity momentum using Aroon Oscillator and other momentum ratios.