Correlation Between Diageo PLC and LATAM Airlines

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

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

Diversification Opportunities for Diageo PLC and LATAM Airlines

-0.53

Correlation Coefficient

Diageo PLC  LATAM Airlines

Excellent diversification

The 3 months correlation between Diageo and LATAM is -0.53. Overlapping area represents the amount of risk that can be diversified away by holding Diageo PLC ADR and LATAM Airlines Group in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on LATAM Airlines Group and Diageo 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 Diageo PLC ADR are associated (or correlated) with LATAM Airlines. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of LATAM Airlines Group has no effect on the direction of Diageo PLC i.e., Diageo PLC and LATAM Airlines go up and down completely randomly.

Pair Corralation between Diageo PLC and LATAM Airlines

Considering the 90-day investment horizon Diageo PLC ADR is expected to under-perform the LATAM Airlines. But the stock apears to be less risky and, when comparing its historical volatility, Diageo PLC ADR is 1.02 times less risky than LATAM Airlines. The stock trades about -0.03 of its potential returns per unit of risk. The LATAM Airlines Group is currently generating about -0.02 of returns per unit of risk over similar time horizon. If you would invest  2,708  in LATAM Airlines Group on October 6, 2024 and sell it today you would lose (39.00) from holding LATAM Airlines Group or give up 1.44% of portfolio value over 90 days.

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

Diageo PLC ADR  vs.  LATAM Airlines Group

Diageo PLC ADR

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Diageo PLC ADR has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest weak performance, the Stock's technical and fundamental indicators remain healthy and the recent disarray on Wall Street may also be a sign of long period gains for the firm investors.

LATAM Airlines Group

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in LATAM Airlines Group are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy basic indicators, LATAM Airlines is not utilizing all of its potentials. The current stock price disarray, may contribute to short-term losses for the investors.

Pair Trading with Diageo PLC and LATAM Airlines

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

The idea behind Diageo PLC ADR and LATAM Airlines 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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.