Correlation Between Diamond Hill and Stepstone

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

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

Diversification Opportunities for Diamond Hill and Stepstone

0.75

Correlation Coefficient

Diamond Hill  Stepstone

Poor diversification

The 3 months correlation between Diamond and Stepstone is 0.75. Overlapping area represents the amount of risk that can be diversified away by holding Diamond Hill Investment and Stepstone Group in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Stepstone Group and Diamond Hill 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 Diamond Hill Investment are associated (or correlated) with Stepstone. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Stepstone Group has no effect on the direction of Diamond Hill i.e., Diamond Hill and Stepstone go up and down completely randomly.

Pair Corralation between Diamond Hill and Stepstone

Given the investment horizon of 90 days Diamond Hill is expected to generate 2.97 times less return on investment than Stepstone. But when comparing it to its historical volatility, Diamond Hill Investment is 1.33 times less risky than Stepstone. It trades about 0.06 of its potential returns per unit of risk. Stepstone Group is currently generating about 0.13 of returns per unit of risk over similar time horizon. If you would invest  5,295  in Stepstone Group on September 14, 2024 and sell it today you would earn a total of  906.00  from holding Stepstone Group or generate 17.11% return on investment over 90 days.

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

Diamond Hill Investment  vs.  Stepstone Group

Diamond Hill Investment

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Diamond Hill Investment are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. Despite quite persistent forward indicators, Diamond Hill is not utilizing all of its potentials. The recent stock price mess, may contribute to short-term losses for the institutional investors.

Stepstone Group

Risk-Adjusted Performance

9 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Stepstone Group are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. Even with relatively abnormal technical and fundamental indicators, Stepstone reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Diamond Hill and Stepstone

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

The idea behind Diamond Hill Investment and Stepstone 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 Idea Analyzer module to analyze all characteristics, volatility and risk-adjusted return of Macroaxis ideas.