Correlation Between E M and Convenience Foods

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

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

Diversification Opportunities for E M and Convenience Foods

0.65

Correlation Coefficient

E M  Convenience Foods

Poor diversification

The 3 months correlation between EMLN0000 and Convenience is 0.65. Overlapping area represents the amount of risk that can be diversified away by holding E M L and Convenience Foods PLC in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Convenience Foods PLC and E M 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 M L are associated (or correlated) with Convenience Foods. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Convenience Foods PLC has no effect on the direction of E M i.e., E M and Convenience Foods go up and down completely randomly.

Pair Corralation between E M and Convenience Foods

Assuming the 90 days trading horizon E M is expected to generate 1.68 times less return on investment than Convenience Foods. In addition to that, E M is 1.63 times more volatile than Convenience Foods PLC. It trades about 0.06 of its total potential returns per unit of risk. Convenience Foods PLC is currently generating about 0.16 per unit of volatility. If you would invest  95,000  in Convenience Foods PLC on October 23, 2024 and sell it today you would earn a total of  5,500  from holding Convenience Foods PLC or generate 5.79% return on investment over 90 days.

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

E M L  vs.  Convenience Foods PLC

E M L

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in E M L are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, E M sustained solid returns over the last few months and may actually be approaching a breakup point.

Convenience Foods PLC

Risk-Adjusted Performance

18 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Convenience Foods PLC are ranked lower than 18 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Convenience Foods sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with E M and Convenience Foods

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

The idea behind E M L and Convenience Foods 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 Correlation Analysis module to reduce portfolio risk simply by holding instruments which are not perfectly correlated.