Correlation Between American Express and Defence Therapeutics

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

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

Diversification Opportunities for American Express and Defence Therapeutics

-0.45

Correlation Coefficient

American Express  Defence Therapeutics

Very good diversification

The 3 months correlation between American and Defence is -0.45. Overlapping area represents the amount of risk that can be diversified away by holding American Express and Defence Therapeutics in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Defence Therapeutics and American Express 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 American Express are associated (or correlated) with Defence Therapeutics. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Defence Therapeutics has no effect on the direction of American Express i.e., American Express and Defence Therapeutics go up and down completely randomly.

Pair Corralation between American Express and Defence Therapeutics

Considering the 90-day investment horizon American Express is expected to generate 0.58 times more return on investment than Defence Therapeutics. However, American Express is 1.73 times less risky than Defence Therapeutics. It trades about 0.16 of its potential returns per unit of risk. Defence Therapeutics is currently generating about 0.03 per unit of risk. If you would invest  25,833  in American Express on September 13, 2024 and sell it today you would earn a total of  4,197  from holding American Express or generate 16.25% return on investment over 90 days.

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

American Express  vs.  Defence Therapeutics

American Express

Risk-Adjusted Performance

12 of 100

Good

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

Defence Therapeutics

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Defence Therapeutics are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable technical and fundamental indicators, Defence Therapeutics is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with American Express and Defence Therapeutics

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

The idea behind American Express and Defence Therapeutics 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 Portfolio Holdings module to check your current holdings and cash postion to detemine if your portfolio needs rebalancing.