Correlation Between Formula and Palram

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

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

Diversification Opportunities for Formula and Palram

0.89

Correlation Coefficient

Formula  Palram

Very poor diversification

The 3 months correlation between Formula and Palram is 0.89. Overlapping area represents the amount of risk that can be diversified away by holding Formula and Palram in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Palram and Formula 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 Formula are associated (or correlated) with Palram. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Palram has no effect on the direction of Formula i.e., Formula and Palram go up and down completely randomly.

Pair Corralation between Formula and Palram

Assuming the 90 days trading horizon Formula is expected to generate 1.25 times less return on investment than Palram. In addition to that, Formula is 1.23 times more volatile than Palram. It trades about 0.25 of its total potential returns per unit of risk. Palram is currently generating about 0.38 per unit of volatility. If you would invest  639,762  in Palram on September 13, 2024 and sell it today you would earn a total of  200,538  from holding Palram or generate 31.35% return on investment over 90 days.

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

Formula  vs.  Palram

Formula

Risk-Adjusted Performance

19 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Formula are ranked lower than 19 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively weak basic indicators, Formula unveiled solid returns over the last few months and may actually be approaching a breakup point.

Palram

Risk-Adjusted Performance

30 of 100

Strong

Compared to the overall equity markets, risk-adjusted returns on investments in Palram are ranked lower than 30 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Palram sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Formula and Palram

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

The idea behind Formula and Palram 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 Sectors module to list of equity sectors categorizing publicly traded companies based on their primary business activities.