Correlation Between Famous Brands and Allied Electronics

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

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

Diversification Opportunities for Famous Brands and Allied Electronics

0.44

Correlation Coefficient

Famous Brands  Allied Electronics

Very weak diversification

The 3 months correlation between Famous and Allied is 0.44. Overlapping area represents the amount of risk that can be diversified away by holding Famous Brands and Allied Electronics in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Allied Electronics and Famous Brands 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 Famous Brands are associated (or correlated) with Allied Electronics. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Allied Electronics has no effect on the direction of Famous Brands i.e., Famous Brands and Allied Electronics go up and down completely randomly.

Pair Corralation between Famous Brands and Allied Electronics

Assuming the 90 days trading horizon Famous Brands is expected to generate 2.93 times less return on investment than Allied Electronics. But when comparing it to its historical volatility, Famous Brands is 1.39 times less risky than Allied Electronics. It trades about 0.09 of its potential returns per unit of risk. Allied Electronics is currently generating about 0.2 of returns per unit of risk over similar time horizon. If you would invest  131,200  in Allied Electronics on October 13, 2024 and sell it today you would earn a total of  112,700  from holding Allied Electronics or generate 85.9% return on investment over 90 days.

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

Famous Brands  vs.  Allied Electronics

Famous Brands

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Famous Brands has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound technical and fundamental indicators, Famous Brands is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

Allied Electronics

Risk-Adjusted Performance

21 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Allied Electronics are ranked lower than 21 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady technical and fundamental indicators, Allied Electronics exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Famous Brands and Allied Electronics

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

The idea behind Famous Brands and Allied Electronics 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 Equity Search module to search for actively traded equities including funds and ETFs from over 30 global markets.