Correlation Between East West and Allison

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

By analyzing existing cross correlation between East West Bancorp and Allison Transmission 5875, you can compare the effects of market volatilities on East West and Allison 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 East West with a short position of Allison. Check out your portfolio center. Please also check ongoing floating volatility patterns of East West and Allison.

Diversification Opportunities for East West and Allison

0.54

Correlation Coefficient

East West  Allison

Very weak diversification

The 3 months correlation between East and Allison is 0.54. Overlapping area represents the amount of risk that can be diversified away by holding East West Bancorp and Allison Transmission 5875 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Allison Transmission 5875 and East West 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 East West Bancorp are associated (or correlated) with Allison. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Allison Transmission 5875 has no effect on the direction of East West i.e., East West and Allison go up and down completely randomly.

Pair Corralation between East West and Allison

Given the investment horizon of 90 days East West Bancorp is expected to generate 0.51 times more return on investment than Allison. However, East West Bancorp is 1.98 times less risky than Allison. It trades about 0.23 of its potential returns per unit of risk. Allison Transmission 5875 is currently generating about -0.24 per unit of risk. If you would invest  9,665  in East West Bancorp on October 25, 2024 and sell it today you would earn a total of  610.00  from holding East West Bancorp or generate 6.31% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	72.22%
Values	Daily Returns

East West Bancorp  vs.  Allison Transmission 5875

East West Bancorp

Risk-Adjusted Performance

5 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in East West Bancorp are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. In spite of rather uncertain fundamental drivers, East West may actually be approaching a critical reversion point that can send shares even higher in February 2025.

Allison Transmission 5875

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Allison Transmission 5875 has generated negative risk-adjusted returns adding no value to investors with long positions. Despite weak performance in the last few months, the Bond's basic indicators remain somewhat strong which may send shares a bit higher in February 2025. The current disturbance may also be a sign of long term up-swing for Allison Transmission 5875 investors.

Pair Trading with East West and Allison

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

The idea behind East West Bancorp and Allison Transmission 5875 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 Risk-Return Analysis module to view associations between returns expected from investment and the risk you assume.