Correlation Between Compania and Gem Diamonds

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

By analyzing existing cross correlation between Compania de Minas and Gem Diamonds Limited, you can compare the effects of market volatilities on Compania and Gem Diamonds 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 Compania with a short position of Gem Diamonds. Check out your portfolio center. Please also check ongoing floating volatility patterns of Compania and Gem Diamonds.

Diversification Opportunities for Compania and Gem Diamonds

0.67

Correlation Coefficient

Compania  Gem Diamonds

Poor diversification

The 3 months correlation between Compania and Gem is 0.67. Overlapping area represents the amount of risk that can be diversified away by holding Compania de Minas and Gem Diamonds Limited in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Gem Diamonds Limited and Compania 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 Compania de Minas are associated (or correlated) with Gem Diamonds. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Gem Diamonds Limited has no effect on the direction of Compania i.e., Compania and Gem Diamonds go up and down completely randomly.

Pair Corralation between Compania and Gem Diamonds

Considering the 90-day investment horizon Compania de Minas is expected to generate 0.53 times more return on investment than Gem Diamonds. However, Compania de Minas is 1.89 times less risky than Gem Diamonds. It trades about -0.1 of its potential returns per unit of risk. Gem Diamonds Limited is currently generating about -0.08 per unit of risk. If you would invest  1,650  in Compania de Minas on September 30, 2024 and sell it today you would lose (424.00) from holding Compania de Minas or give up 25.7% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	100.0%
Values	Daily Returns

Compania de Minas  vs.  Gem Diamonds Limited

Compania de Minas

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Compania de Minas has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest weak performance, the Stock's basic indicators remain healthy and the recent disarray on Wall Street may also be a sign of long period gains for the firm investors.

Gem Diamonds Limited

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with Compania and Gem Diamonds

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

The idea behind Compania de Minas and Gem Diamonds Limited 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 Idea Analyzer module to analyze all characteristics, volatility and risk-adjusted return of Macroaxis ideas.