Correlation Between Constellation Brands and Diageo Plc

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Can any of the company-specific risk be diversified away by investing in both Constellation Brands and Diageo Plc 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 Constellation Brands and Diageo Plc into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Constellation Brands and Diageo plc, you can compare the effects of market volatilities on Constellation Brands and Diageo Plc 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 Constellation Brands with a short position of Diageo Plc. Check out your portfolio center. Please also check ongoing floating volatility patterns of Constellation Brands and Diageo Plc.

Diversification Opportunities for Constellation Brands and Diageo Plc

-0.15
  Correlation Coefficient

Good diversification

The 3 months correlation between Constellation and Diageo is -0.15. Overlapping area represents the amount of risk that can be diversified away by holding Constellation Brands and Diageo plc in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Diageo plc and Constellation Brands 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 Constellation Brands are associated (or correlated) with Diageo Plc. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Diageo plc has no effect on the direction of Constellation Brands i.e., Constellation Brands and Diageo Plc go up and down completely randomly.

Pair Corralation between Constellation Brands and Diageo Plc

Assuming the 90 days trading horizon Constellation Brands is expected to under-perform the Diageo Plc. But the stock apears to be less risky and, when comparing its historical volatility, Constellation Brands is 1.47 times less risky than Diageo Plc. The stock trades about -0.08 of its potential returns per unit of risk. The Diageo plc is currently generating about -0.02 of returns per unit of risk over similar time horizon. If you would invest  12,400  in Diageo plc on September 29, 2024 and sell it today you would lose (400.00) from holding Diageo plc or give up 3.23% of portfolio value over 90 days.
Time Period3 Months [change]
DirectionMoves Against 
StrengthInsignificant
Accuracy98.41%
ValuesDaily Returns

Constellation Brands  vs.  Diageo plc

 Performance 
       Timeline  
Constellation Brands 

Risk-Adjusted Performance

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Weak
 
Strong
Very Weak
Over the last 90 days Constellation Brands has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable basic indicators, Constellation Brands is not utilizing all of its potentials. The newest stock price disturbance, may contribute to mid-run losses for the stockholders.
Diageo plc 

Risk-Adjusted Performance

0 of 100

 
Weak
 
Strong
Very Weak
Over the last 90 days Diageo plc has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable forward indicators, Diageo Plc is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Constellation Brands and Diageo Plc Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Constellation Brands and Diageo Plc

The main advantage of trading using opposite Constellation Brands and Diageo Plc positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Constellation Brands position performs unexpectedly, Diageo Plc 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 Diageo Plc will offset losses from the drop in Diageo Plc's long position.
The idea behind Constellation Brands and Diageo plc 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 Analyst Advice module to analyst recommendations and target price estimates broken down by several categories.

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