Correlation Between Associated Alcohols and Action Construction

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

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

Diversification Opportunities for Associated Alcohols and Action Construction

0.83

Correlation Coefficient

Associated Alcohols  Action Construction

Very poor diversification

The 3 months correlation between Associated and Action is 0.83. Overlapping area represents the amount of risk that can be diversified away by holding Associated Alcohols Breweries and Action Construction Equipment in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Action Construction and Associated Alcohols 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 Associated Alcohols Breweries are associated (or correlated) with Action Construction. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Action Construction has no effect on the direction of Associated Alcohols i.e., Associated Alcohols and Action Construction go up and down completely randomly.

Pair Corralation between Associated Alcohols and Action Construction

Assuming the 90 days trading horizon Associated Alcohols is expected to generate 1.29 times less return on investment than Action Construction. But when comparing it to its historical volatility, Associated Alcohols Breweries is 1.14 times less risky than Action Construction. It trades about 0.1 of its potential returns per unit of risk. Action Construction Equipment is currently generating about 0.11 of returns per unit of risk over similar time horizon. If you would invest  37,278  in Action Construction Equipment on October 10, 2024 and sell it today you would earn a total of  111,972  from holding Action Construction Equipment or generate 300.37% return on investment over 90 days.

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

Associated Alcohols Breweries  vs.  Action Construction Equipment

Associated Alcohols

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Associated Alcohols Breweries are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. Even with relatively inconsistent fundamental indicators, Associated Alcohols reported solid returns over the last few months and may actually be approaching a breakup point.

Action Construction

Risk-Adjusted Performance

5 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Action Construction Equipment are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady technical and fundamental indicators, Action Construction exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Associated Alcohols and Action Construction

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

The idea behind Associated Alcohols Breweries and Action Construction Equipment 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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.