Correlation Between Telefonaktiebolaget and ADVA Optical

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

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

Diversification Opportunities for Telefonaktiebolaget and ADVA Optical

0.63

Correlation Coefficient

Telefonaktiebolaget  ADVA Optical

Poor diversification

The 3 months correlation between Telefonaktiebolaget and ADVA is 0.63. Overlapping area represents the amount of risk that can be diversified away by holding Telefonaktiebolaget LM Ericsso and ADVA Optical Networking in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on ADVA Optical Networking and Telefonaktiebolaget 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 Telefonaktiebolaget LM Ericsson are associated (or correlated) with ADVA Optical. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of ADVA Optical Networking has no effect on the direction of Telefonaktiebolaget i.e., Telefonaktiebolaget and ADVA Optical go up and down completely randomly.

Pair Corralation between Telefonaktiebolaget and ADVA Optical

Assuming the 90 days trading horizon Telefonaktiebolaget LM Ericsson is expected to generate 7.96 times more return on investment than ADVA Optical. However, Telefonaktiebolaget is 7.96 times more volatile than ADVA Optical Networking. It trades about 0.18 of its potential returns per unit of risk. ADVA Optical Networking is currently generating about 0.15 per unit of risk. If you would invest  7,517  in Telefonaktiebolaget LM Ericsson on August 30, 2024 and sell it today you would earn a total of  1,411  from holding Telefonaktiebolaget LM Ericsson or generate 18.77% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	96.92%
Values	Daily Returns

Telefonaktiebolaget LM Ericsso  vs.  ADVA Optical Networking

Telefonaktiebolaget

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Telefonaktiebolaget LM Ericsson are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. Despite somewhat uncertain forward indicators, Telefonaktiebolaget sustained solid returns over the last few months and may actually be approaching a breakup point.

ADVA Optical Networking

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in ADVA Optical Networking are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable basic indicators, ADVA Optical is not utilizing all of its potentials. The recent stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with Telefonaktiebolaget and ADVA Optical

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

The idea behind Telefonaktiebolaget LM Ericsson and ADVA Optical Networking 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 Financial Widgets module to easily integrated Macroaxis content with over 30 different plug-and-play financial widgets.