Correlation Between Associated Alcohols and Royal Orchid

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

Diversification Opportunities for Associated Alcohols and Royal Orchid

0.86

Correlation Coefficient

Associated Alcohols  Royal Orchid

Very poor diversification

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

Pair Corralation between Associated Alcohols and Royal Orchid

Assuming the 90 days trading horizon Associated Alcohols Breweries is expected to generate 1.2 times more return on investment than Royal Orchid. However, Associated Alcohols is 1.2 times more volatile than Royal Orchid Hotels. It trades about 0.13 of its potential returns per unit of risk. Royal Orchid Hotels is currently generating about 0.03 per unit of risk. If you would invest  76,025  in Associated Alcohols Breweries on October 22, 2024 and sell it today you would earn a total of  39,200  from holding Associated Alcohols Breweries or generate 51.56% 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.  Royal Orchid Hotels

Associated Alcohols

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Associated Alcohols Breweries are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. Even with relatively weak fundamental indicators, Associated Alcohols reported solid returns over the last few months and may actually be approaching a breakup point.

Royal Orchid Hotels

Risk-Adjusted Performance

8 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Royal Orchid Hotels are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. Despite somewhat uncertain essential indicators, Royal Orchid sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Associated Alcohols and Royal Orchid

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

The idea behind Associated Alcohols Breweries and Royal Orchid Hotels 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 Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.