Correlation Between Evolution and Spirent Communications

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

By analyzing existing cross correlation between Evolution AB and Spirent Communications plc, you can compare the effects of market volatilities on Evolution and Spirent Communications 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 Evolution with a short position of Spirent Communications. Check out your portfolio center. Please also check ongoing floating volatility patterns of Evolution and Spirent Communications.

Diversification Opportunities for Evolution and Spirent Communications

-0.66

Correlation Coefficient

Evolution  Spirent Communications

Excellent diversification

The 3 months correlation between Evolution and Spirent is -0.66. Overlapping area represents the amount of risk that can be diversified away by holding Evolution AB and Spirent Communications plc in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Spirent Communications and Evolution 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 Evolution AB are associated (or correlated) with Spirent Communications. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Spirent Communications has no effect on the direction of Evolution i.e., Evolution and Spirent Communications go up and down completely randomly.

Pair Corralation between Evolution and Spirent Communications

Assuming the 90 days trading horizon Evolution AB is expected to under-perform the Spirent Communications. But the stock apears to be less risky and, when comparing its historical volatility, Evolution AB is 1.07 times less risky than Spirent Communications. The stock trades about -0.28 of its potential returns per unit of risk. The Spirent Communications plc is currently generating about -0.12 of returns per unit of risk over similar time horizon. If you would invest  216.00  in Spirent Communications plc on October 10, 2024 and sell it today you would lose (10.00) from holding Spirent Communications plc or give up 4.63% of portfolio value over 90 days.

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

Evolution AB  vs.  Spirent Communications plc

Evolution AB

Risk-Adjusted Performance

0 of 100

Very Weak

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

Spirent Communications

Risk-Adjusted Performance

0 of 100

Insignificant

Over the last 90 days Spirent Communications plc has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable basic indicators, Spirent Communications is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with Evolution and Spirent Communications

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

The idea behind Evolution AB and Spirent Communications 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.

Check out your portfolio center.

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 Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.