Correlation Between Diageo PLC and Stepan

Can any of the company-specific risk be diversified away by investing in both Diageo PLC and Stepan 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 Stepan 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 Stepan Company, you can compare the effects of market volatilities on Diageo PLC and Stepan 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 Stepan. Check out your portfolio center. Please also check ongoing floating volatility patterns of Diageo PLC and Stepan.

Diversification Opportunities for Diageo PLC and Stepan

-0.07

Correlation Coefficient

Diageo PLC  Stepan

Good diversification

The 3 months correlation between Diageo and Stepan is -0.07. Overlapping area represents the amount of risk that can be diversified away by holding Diageo PLC ADR and Stepan Company in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Stepan Company 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 Stepan. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Stepan Company has no effect on the direction of Diageo PLC i.e., Diageo PLC and Stepan go up and down completely randomly.

Pair Corralation between Diageo PLC and Stepan

Considering the 90-day investment horizon Diageo PLC ADR is expected to generate 0.81 times more return on investment than Stepan. However, Diageo PLC ADR is 1.24 times less risky than Stepan. It trades about -0.05 of its potential returns per unit of risk. Stepan Company is currently generating about -0.1 per unit of risk. If you would invest  13,318  in Diageo PLC ADR on September 25, 2024 and sell it today you would lose (749.00) from holding Diageo PLC ADR or give up 5.62% of portfolio value over 90 days.

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

Diageo PLC ADR  vs.  Stepan Company

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 very healthy technical and fundamental indicators, Diageo PLC is not utilizing all of its potentials. The current stock price disarray, may contribute to short-term losses for the investors.

Stepan Company

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Stepan Company has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest unsteady performance, the Stock's fundamental indicators remain persistent and the latest mess on Wall Street may also be a sign of long-standing gains for the company institutional investors.

Pair Trading with Diageo PLC and Stepan

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

The idea behind Diageo PLC ADR and Stepan Company 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 Comparator module to compare the composition, asset allocations and performance of any two portfolios in your account.