Correlation Between South Basic and Southern Rubber

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

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

Diversification Opportunities for South Basic and Southern Rubber

0.79

Correlation Coefficient

South Basic  Southern Rubber

Poor diversification

The 3 months correlation between South and Southern is 0.79. Overlapping area represents the amount of risk that can be diversified away by holding South Basic Chemicals and Southern Rubber Industry in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Southern Rubber Industry and South Basic 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 South Basic Chemicals are associated (or correlated) with Southern Rubber. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Southern Rubber Industry has no effect on the direction of South Basic i.e., South Basic and Southern Rubber go up and down completely randomly.

Pair Corralation between South Basic and Southern Rubber

Assuming the 90 days trading horizon South Basic is expected to generate 1.22 times less return on investment than Southern Rubber. But when comparing it to its historical volatility, South Basic Chemicals is 1.14 times less risky than Southern Rubber. It trades about 0.35 of its potential returns per unit of risk. Southern Rubber Industry is currently generating about 0.37 of returns per unit of risk over similar time horizon. If you would invest  1,185,000  in Southern Rubber Industry on September 21, 2024 and sell it today you would earn a total of  260,000  from holding Southern Rubber Industry or generate 21.94% return on investment over 90 days.

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

South Basic Chemicals  vs.  Southern Rubber Industry

South Basic Chemicals

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in South Basic Chemicals are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. In spite of very unfluctuating basic indicators, South Basic may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Southern Rubber Industry

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Southern Rubber Industry are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. In spite of very unfluctuating primary indicators, Southern Rubber displayed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with South Basic and Southern Rubber

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

The idea behind South Basic Chemicals and Southern Rubber Industry 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.

Check out your portfolio center.

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 Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.