Correlation Between CochLear and Wesfarmers

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

By analyzing existing cross correlation between CochLear Ltd ADR and Wesfarmers Ltd ADR, you can compare the effects of market volatilities on CochLear and Wesfarmers 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 CochLear with a short position of Wesfarmers. Check out your portfolio center. Please also check ongoing floating volatility patterns of CochLear and Wesfarmers.

Diversification Opportunities for CochLear and Wesfarmers

0.47

Correlation Coefficient

CochLear  Wesfarmers

Very weak diversification

The 3 months correlation between CochLear and Wesfarmers is 0.47. Overlapping area represents the amount of risk that can be diversified away by holding CochLear Ltd ADR and Wesfarmers Ltd ADR in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Wesfarmers ADR and CochLear 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 CochLear Ltd ADR are associated (or correlated) with Wesfarmers. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Wesfarmers ADR has no effect on the direction of CochLear i.e., CochLear and Wesfarmers go up and down completely randomly.

Pair Corralation between CochLear and Wesfarmers

Assuming the 90 days horizon CochLear Ltd ADR is expected to generate 0.9 times more return on investment than Wesfarmers. However, CochLear Ltd ADR is 1.11 times less risky than Wesfarmers. It trades about 0.05 of its potential returns per unit of risk. Wesfarmers Ltd ADR is currently generating about 0.01 per unit of risk. If you would invest  9,476  in CochLear Ltd ADR on October 25, 2024 and sell it today you would earn a total of  434.00  from holding CochLear Ltd ADR or generate 4.58% return on investment over 90 days.

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

CochLear Ltd ADR  vs.  Wesfarmers Ltd ADR

CochLear ADR

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in CochLear Ltd ADR are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. In spite of fairly strong basic indicators, CochLear is not utilizing all of its potentials. The recent stock price disturbance, may contribute to short-term losses for the investors.

Wesfarmers ADR

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Wesfarmers Ltd ADR has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong technical and fundamental indicators, Wesfarmers is not utilizing all of its potentials. The latest stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with CochLear and Wesfarmers

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

The idea behind CochLear Ltd ADR and Wesfarmers Ltd ADR 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 Investing Opportunities module to build portfolios using our predefined set of ideas and optimize them against your investing preferences.