Correlation Between Dorman Products and Allison Transmission

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

By analyzing existing cross correlation between Dorman Products and Allison Transmission Holdings, you can compare the effects of market volatilities on Dorman Products and Allison Transmission 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 Dorman Products with a short position of Allison Transmission. Check out your portfolio center. Please also check ongoing floating volatility patterns of Dorman Products and Allison Transmission.

Diversification Opportunities for Dorman Products and Allison Transmission

0.42

Correlation Coefficient

Dorman Products  Allison Transmission

Very weak diversification

The 3 months correlation between Dorman and Allison is 0.42. Overlapping area represents the amount of risk that can be diversified away by holding Dorman Products and Allison Transmission Holdings in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Allison Transmission and Dorman Products 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 Dorman Products are associated (or correlated) with Allison Transmission. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Allison Transmission has no effect on the direction of Dorman Products i.e., Dorman Products and Allison Transmission go up and down completely randomly.

Pair Corralation between Dorman Products and Allison Transmission

Given the investment horizon of 90 days Dorman Products is expected to generate 0.67 times more return on investment than Allison Transmission. However, Dorman Products is 1.48 times less risky than Allison Transmission. It trades about -0.04 of its potential returns per unit of risk. Allison Transmission Holdings is currently generating about -0.07 per unit of risk. If you would invest  13,125  in Dorman Products on December 29, 2024 and sell it today you would lose (610.00) from holding Dorman Products or give up 4.65% of portfolio value over 90 days.

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

Dorman Products  vs.  Allison Transmission Holdings

Dorman Products

Risk-Adjusted Performance

Very Weak

Over the last 90 days Dorman Products has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy basic indicators, Dorman Products is not utilizing all of its potentials. The latest stock price disarray, may contribute to short-term losses for the investors.

Allison Transmission

Risk-Adjusted Performance

Very Weak

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

Pair Trading with Dorman Products and Allison Transmission

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

The idea behind Dorman Products and Allison Transmission Holdings 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 Aroon Oscillator module to analyze current equity momentum using Aroon Oscillator and other momentum ratios.