Correlation Between Diageo Plc and Naked Wines

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

By analyzing existing cross correlation between Diageo plc and Naked Wines plc, you can compare the effects of market volatilities on Diageo Plc and Naked Wines 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 Naked Wines. Check out your portfolio center. Please also check ongoing floating volatility patterns of Diageo Plc and Naked Wines.

Diversification Opportunities for Diageo Plc and Naked Wines

0.11

Correlation Coefficient

Diageo Plc  Naked Wines

Average diversification

The 3 months correlation between Diageo and Naked is 0.11. Overlapping area represents the amount of risk that can be diversified away by holding Diageo plc and Naked Wines plc in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Naked Wines plc 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 Naked Wines. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Naked Wines plc has no effect on the direction of Diageo Plc i.e., Diageo Plc and Naked Wines go up and down completely randomly.

Pair Corralation between Diageo Plc and Naked Wines

Assuming the 90 days horizon Diageo plc is expected to under-perform the Naked Wines. But the pink sheet apears to be less risky and, when comparing its historical volatility, Diageo plc is 3.23 times less risky than Naked Wines. The pink sheet trades about -0.02 of its potential returns per unit of risk. The Naked Wines plc is currently generating about 0.02 of returns per unit of risk over similar time horizon. If you would invest  88.00  in Naked Wines plc on October 4, 2024 and sell it today you would lose (30.00) from holding Naked Wines plc or give up 34.09% of portfolio value over 90 days.

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

Diageo plc  vs.  Naked Wines plc

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. Despite nearly stable basic indicators, Diageo Plc is not utilizing all of its potentials. The recent stock price disturbance, may contribute to mid-run losses for the stockholders.

Naked Wines plc

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Naked Wines plc has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest fragile performance, the Stock's basic indicators remain stable and the current disturbance on Wall Street may also be a sign of long-run gains for the company stockholders.

Pair Trading with Diageo Plc and Naked Wines

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

The idea behind Diageo plc and Naked Wines plc 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 Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.