Correlation Between Investment and Foreign Trade

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

By analyzing existing cross correlation between Investment and Industrial and Foreign Trade Development, you can compare the effects of market volatilities on Investment and Foreign Trade 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 Investment with a short position of Foreign Trade. Check out your portfolio center. Please also check ongoing floating volatility patterns of Investment and Foreign Trade.

Diversification Opportunities for Investment and Foreign Trade

0.35

Correlation Coefficient

Investment  Foreign Trade

Weak diversification

The 3 months correlation between Investment and Foreign is 0.35. Overlapping area represents the amount of risk that can be diversified away by holding Investment and Industrial and Foreign Trade Development in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Foreign Trade Development and Investment 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 Investment and Industrial are associated (or correlated) with Foreign Trade. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Foreign Trade Development has no effect on the direction of Investment i.e., Investment and Foreign Trade go up and down completely randomly.

Pair Corralation between Investment and Foreign Trade

Assuming the 90 days trading horizon Investment is expected to generate 2.58 times less return on investment than Foreign Trade. But when comparing it to its historical volatility, Investment and Industrial is 3.49 times less risky than Foreign Trade. It trades about 0.08 of its potential returns per unit of risk. Foreign Trade Development is currently generating about 0.06 of returns per unit of risk over similar time horizon. If you would invest  1,595,000  in Foreign Trade Development on October 10, 2024 and sell it today you would earn a total of  95,000  from holding Foreign Trade Development or generate 5.96% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	54.69%
Values	Daily Returns

Investment and Industrial  vs.  Foreign Trade Development

Investment and Industrial

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Investment and Industrial are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. In spite of very unfluctuating primary indicators, Investment may actually be approaching a critical reversion point that can send shares even higher in February 2025.

Foreign Trade Development

Risk-Adjusted Performance

0 of 100

Insignificant

Over the last 90 days Foreign Trade Development has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very unfluctuating fundamental indicators, Foreign Trade displayed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Investment and Foreign Trade

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

The idea behind Investment and Industrial and Foreign Trade Development 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 Price Exposure Probability module to analyze equity upside and downside potential for a given time horizon across multiple markets.