Correlation Between Australian Dollar and EROAD

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

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

Diversification Opportunities for Australian Dollar and EROAD

0.09

Correlation Coefficient

Australian Dollar  EROAD

Significant diversification

The 3 months correlation between Australian and EROAD is 0.09. Overlapping area represents the amount of risk that can be diversified away by holding Australian Dollar Currency and EROAD in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on EROAD and Australian Dollar 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 Australian Dollar Currency are associated (or correlated) with EROAD. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of EROAD has no effect on the direction of Australian Dollar i.e., Australian Dollar and EROAD go up and down completely randomly.

Pair Corralation between Australian Dollar and EROAD

Assuming the 90 days trading horizon Australian Dollar Currency is expected to under-perform the EROAD. But the index apears to be less risky and, when comparing its historical volatility, Australian Dollar Currency is 9.13 times less risky than EROAD. The index trades about -0.14 of its potential returns per unit of risk. The EROAD is currently generating about 0.02 of returns per unit of risk over similar time horizon. If you would invest  104.00  in EROAD on September 30, 2024 and sell it today you would lose (1.00) from holding EROAD or give up 0.96% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Insignificant
Accuracy	98.44%
Values	Daily Returns

Australian Dollar Currency  vs.  EROAD

Pair Trading with Australian Dollar and EROAD

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

The idea behind Australian Dollar Currency and EROAD 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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.