Correlation Between Diageo PLC and InterContinental

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

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

Diversification Opportunities for Diageo PLC and InterContinental

-0.55

Correlation Coefficient

Diageo PLC  InterContinental

Excellent diversification

The 3 months correlation between Diageo and InterContinental is -0.55. Overlapping area represents the amount of risk that can be diversified away by holding Diageo 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 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 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 Diageo PLC i.e., Diageo PLC and InterContinental go up and down completely randomly.

Pair Corralation between Diageo PLC and InterContinental

Assuming the 90 days trading horizon Diageo PLC is expected to generate 1.35 times more return on investment than InterContinental. However, Diageo PLC is 1.35 times more volatile than InterContinental Hotels Group. It trades about 0.19 of its potential returns per unit of risk. InterContinental Hotels Group is currently generating about 0.19 per unit of risk. If you would invest  235,750  in Diageo PLC on September 21, 2024 and sell it today you would earn a total of  14,700  from holding Diageo PLC or generate 6.24% return on investment over 90 days.

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

Diageo PLC  vs.  InterContinental Hotels Group

Diageo PLC

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Diageo PLC has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound technical and fundamental indicators, Diageo PLC is not utilizing all of its potentials. The newest stock price tumult, may contribute to shorter-term losses for the shareholders.

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 Diageo PLC and InterContinental

The main advantage of trading using opposite Diageo PLC and InterContinental positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Diageo 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 Diageo 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 Equity Valuation module to check real value of public entities based on technical and fundamental data.