Correlation Between E L and Doman Building

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

By analyzing existing cross correlation between E L Financial Corp and Doman Building Materials, you can compare the effects of market volatilities on E L and Doman Building 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 E L with a short position of Doman Building. Check out your portfolio center. Please also check ongoing floating volatility patterns of E L and Doman Building.

Diversification Opportunities for E L and Doman Building

0.73

Correlation Coefficient

E L  Doman Building

Poor diversification

The 3 months correlation between ELF and Doman is 0.73. Overlapping area represents the amount of risk that can be diversified away by holding E L Financial Corp and Doman Building Materials in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Doman Building Materials and E L 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 E L Financial Corp are associated (or correlated) with Doman Building. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Doman Building Materials has no effect on the direction of E L i.e., E L and Doman Building go up and down completely randomly.

Pair Corralation between E L and Doman Building

Assuming the 90 days trading horizon E L is expected to generate 3.24 times less return on investment than Doman Building. But when comparing it to its historical volatility, E L Financial Corp is 1.3 times less risky than Doman Building. It trades about 0.09 of its potential returns per unit of risk. Doman Building Materials is currently generating about 0.22 of returns per unit of risk over similar time horizon. If you would invest  724.00  in Doman Building Materials on September 13, 2024 and sell it today you would earn a total of  221.00  from holding Doman Building Materials or generate 30.52% return on investment over 90 days.

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

E L Financial Corp  vs.  Doman Building Materials

E L Financial

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in E L Financial Corp are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of very unfluctuating technical and fundamental indicators, E L may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Doman Building Materials

Risk-Adjusted Performance

17 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Doman Building Materials are ranked lower than 17 (%) of all global equities and portfolios over the last 90 days. In spite of very unfluctuating primary indicators, Doman Building displayed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with E L and Doman Building

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

The idea behind E L Financial Corp and Doman Building Materials 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.