Correlation Between Electra and Elco

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

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

Diversification Opportunities for Electra and Elco

0.97

Correlation Coefficient

Electra  Elco

Almost no diversification

The 3 months correlation between Electra and Elco is 0.97. Overlapping area represents the amount of risk that can be diversified away by holding Electra and Elco in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Elco and Electra 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 Electra are associated (or correlated) with Elco. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Elco has no effect on the direction of Electra i.e., Electra and Elco go up and down completely randomly.

Pair Corralation between Electra and Elco

Assuming the 90 days trading horizon Electra is expected to generate 1.17 times less return on investment than Elco. In addition to that, Electra is 1.13 times more volatile than Elco. It trades about 0.36 of its total potential returns per unit of risk. Elco is currently generating about 0.48 per unit of volatility. If you would invest  1,033,000  in Elco on October 10, 2024 and sell it today you would earn a total of  550,000  from holding Elco or generate 53.24% return on investment over 90 days.

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

Electra  vs.  Elco

Electra

Risk-Adjusted Performance

28 of 100

Strong

Compared to the overall equity markets, risk-adjusted returns on investments in Electra are ranked lower than 28 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Electra sustained solid returns over the last few months and may actually be approaching a breakup point.

Elco

Risk-Adjusted Performance

37 of 100

Very Strong

Compared to the overall equity markets, risk-adjusted returns on investments in Elco are ranked lower than 37 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Elco sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Electra and Elco

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

The idea behind Electra and Elco 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 Options Analysis module to analyze and evaluate options and option chains as a potential hedge for your portfolios.