Correlation Between Alibaba Group and Advanced Drainage

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

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

Diversification Opportunities for Alibaba Group and Advanced Drainage

0.8

Correlation Coefficient

Alibaba Group  Advanced Drainage

Very poor diversification

The 3 months correlation between Alibaba and Advanced is 0.8. Overlapping area represents the amount of risk that can be diversified away by holding Alibaba Group Holding and Advanced Drainage Systems in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Advanced Drainage Systems and Alibaba Group 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 Alibaba Group Holding are associated (or correlated) with Advanced Drainage. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Advanced Drainage Systems has no effect on the direction of Alibaba Group i.e., Alibaba Group and Advanced Drainage go up and down completely randomly.

Pair Corralation between Alibaba Group and Advanced Drainage

Given the investment horizon of 90 days Alibaba Group Holding is expected to under-perform the Advanced Drainage. But the stock apears to be less risky and, when comparing its historical volatility, Alibaba Group Holding is 1.04 times less risky than Advanced Drainage. The stock trades about -0.01 of its potential returns per unit of risk. The Advanced Drainage Systems is currently generating about 0.04 of returns per unit of risk over similar time horizon. If you would invest  7,954  in Advanced Drainage Systems on October 5, 2024 and sell it today you would earn a total of  3,156  from holding Advanced Drainage Systems or generate 39.68% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	99.0%
Values	Daily Returns

Alibaba Group Holding  vs.  Advanced Drainage Systems

Alibaba Group Holding

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Alibaba Group Holding has generated negative risk-adjusted returns adding no value to investors with long positions. Despite unsteady performance in the last few months, the Stock's fundamental drivers remain somewhat strong which may send shares a bit higher in February 2025. The current disturbance may also be a sign of long term up-swing for the company investors.

Advanced Drainage Systems

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Advanced Drainage Systems has generated negative risk-adjusted returns adding no value to investors with long positions. Despite fragile performance in the last few months, the Stock's basic indicators remain nearly stable which may send shares a bit higher in February 2025. The current disturbance may also be a sign of long-run up-swing for the company stockholders.

Pair Trading with Alibaba Group and Advanced Drainage

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

The idea behind Alibaba Group Holding and Advanced Drainage Systems 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 Bond Analysis module to evaluate and analyze corporate bonds as a potential investment for your portfolios..