Correlation Between Centrica PLC and InterContinental

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

By analyzing existing cross correlation between Centrica PLC and InterContinental Hotels Group, you can compare the effects of market volatilities on Centrica PLC and InterContinental 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 Centrica PLC with a short position of InterContinental. Check out your portfolio center. Please also check ongoing floating volatility patterns of Centrica PLC and InterContinental.

Diversification Opportunities for Centrica PLC and InterContinental

0.24

Correlation Coefficient

Centrica PLC  InterContinental

Modest diversification

The 3 months correlation between Centrica and InterContinental is 0.24. Overlapping area represents the amount of risk that can be diversified away by holding Centrica PLC and InterContinental Hotels Group in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on InterContinental Hotels and Centrica PLC 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 Centrica PLC are associated (or correlated) with InterContinental. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of InterContinental Hotels has no effect on the direction of Centrica PLC i.e., Centrica PLC and InterContinental go up and down completely randomly.

Pair Corralation between Centrica PLC and InterContinental

Assuming the 90 days trading horizon Centrica PLC is expected to generate 1.17 times less return on investment than InterContinental. In addition to that, Centrica PLC is 1.34 times more volatile than InterContinental Hotels Group. It trades about 0.12 of its total potential returns per unit of risk. InterContinental Hotels Group is currently generating about 0.19 per unit of volatility. If you would invest  952,000  in InterContinental Hotels Group on September 21, 2024 and sell it today you would earn a total of  43,600  from holding InterContinental Hotels Group or generate 4.58% return on investment over 90 days.

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

Centrica PLC  vs.  InterContinental Hotels Group

Centrica PLC

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Centrica PLC are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of rather uncertain technical and fundamental indicators, Centrica PLC exhibited solid returns over the last few months and may actually be approaching a breakup point.

InterContinental Hotels

Risk-Adjusted Performance

21 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in InterContinental Hotels Group are ranked lower than 21 (%) of all global equities and portfolios over the last 90 days. In spite of rather uncertain technical and fundamental indicators, InterContinental exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Centrica PLC and InterContinental

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

The idea behind Centrica PLC and InterContinental Hotels Group 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 Portfolio Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.