Correlation Between CSL and Xero

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

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

Diversification Opportunities for CSL and Xero

0.2

Correlation Coefficient

CSL  Xero

Modest diversification

The 3 months correlation between CSL and Xero is 0.2. Overlapping area represents the amount of risk that can be diversified away by holding CSL and Xero in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Xero and CSL 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 CSL are associated (or correlated) with Xero. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Xero has no effect on the direction of CSL i.e., CSL and Xero go up and down completely randomly.

Pair Corralation between CSL and Xero

Assuming the 90 days trading horizon CSL is expected to under-perform the Xero. But the stock apears to be less risky and, when comparing its historical volatility, CSL is 1.28 times less risky than Xero. The stock trades about -0.15 of its potential returns per unit of risk. The Xero is currently generating about -0.05 of returns per unit of risk over similar time horizon. If you would invest  16,739  in Xero on December 28, 2024 and sell it today you would lose (825.00) from holding Xero or give up 4.93% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	98.41%
Values	Daily Returns

CSL  vs.  Xero

CSL

Risk-Adjusted Performance

Very Weak

Over the last 90 days CSL has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest uncertain performance, the Stock's essential indicators remain stable and the newest uproar on Wall Street may also be a sign of mid-term gains for the firm private investors.

Xero

Risk-Adjusted Performance

Very Weak

Over the last 90 days Xero has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of comparatively stable basic indicators, Xero is not utilizing all of its potentials. The newest stock price uproar, may contribute to short-horizon losses for the private investors.

Pair Trading with CSL and Xero

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

The idea behind CSL and Xero 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 Fundamentals Comparison module to compare fundamentals across multiple equities to find investing opportunities.