Correlation Between Blue Lagoon and Cerrado Gold

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

By analyzing existing cross correlation between Blue Lagoon Resources and Cerrado Gold, you can compare the effects of market volatilities on Blue Lagoon and Cerrado Gold 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 Blue Lagoon with a short position of Cerrado Gold. Check out your portfolio center. Please also check ongoing floating volatility patterns of Blue Lagoon and Cerrado Gold.

Diversification Opportunities for Blue Lagoon and Cerrado Gold

-0.32

Correlation Coefficient

Blue Lagoon  Cerrado Gold

Very good diversification

The 3 months correlation between Blue and Cerrado is -0.32. Overlapping area represents the amount of risk that can be diversified away by holding Blue Lagoon Resources and Cerrado Gold in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Cerrado Gold and Blue Lagoon 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 Blue Lagoon Resources are associated (or correlated) with Cerrado Gold. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Cerrado Gold has no effect on the direction of Blue Lagoon i.e., Blue Lagoon and Cerrado Gold go up and down completely randomly.

Pair Corralation between Blue Lagoon and Cerrado Gold

Assuming the 90 days horizon Blue Lagoon is expected to generate 3.03 times less return on investment than Cerrado Gold. But when comparing it to its historical volatility, Blue Lagoon Resources is 1.23 times less risky than Cerrado Gold. It trades about 0.01 of its potential returns per unit of risk. Cerrado Gold is currently generating about 0.02 of returns per unit of risk over similar time horizon. If you would invest  73.00  in Cerrado Gold on October 22, 2024 and sell it today you would lose (43.00) from holding Cerrado Gold or give up 58.9% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	99.8%
Values	Daily Returns

Blue Lagoon Resources  vs.  Cerrado Gold

Blue Lagoon Resources

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Blue Lagoon Resources are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile technical and fundamental indicators, Blue Lagoon reported solid returns over the last few months and may actually be approaching a breakup point.

Cerrado Gold

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Cerrado Gold are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Cerrado Gold reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Blue Lagoon and Cerrado Gold

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

The idea behind Blue Lagoon Resources and Cerrado Gold 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 Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.