Correlation Between Fast Retailing and WPP PLC

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

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

Diversification Opportunities for Fast Retailing and WPP PLC

0.15

Correlation Coefficient

Fast Retailing  WPP PLC

Average diversification

The 3 months correlation between Fast and WPP is 0.15. Overlapping area represents the amount of risk that can be diversified away by holding Fast Retailing Co and WPP PLC in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on WPP PLC and Fast Retailing 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 Fast Retailing Co are associated (or correlated) with WPP PLC. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of WPP PLC has no effect on the direction of Fast Retailing i.e., Fast Retailing and WPP PLC go up and down completely randomly.

Pair Corralation between Fast Retailing and WPP PLC

Assuming the 90 days trading horizon Fast Retailing Co is expected to generate 1.8 times more return on investment than WPP PLC. However, Fast Retailing is 1.8 times more volatile than WPP PLC. It trades about 0.08 of its potential returns per unit of risk. WPP PLC is currently generating about 0.14 per unit of risk. If you would invest  30,560  in Fast Retailing Co on October 8, 2024 and sell it today you would earn a total of  2,710  from holding Fast Retailing Co or generate 8.87% return on investment over 90 days.

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

Fast Retailing Co  vs.  WPP PLC

Fast Retailing

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Fast Retailing Co are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. In spite of rather fragile basic indicators, Fast Retailing may actually be approaching a critical reversion point that can send shares even higher in February 2025.

WPP PLC

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in WPP PLC are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively fragile basic indicators, WPP PLC may actually be approaching a critical reversion point that can send shares even higher in February 2025.

Pair Trading with Fast Retailing and WPP PLC

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

The idea behind Fast Retailing Co and WPP 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.

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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 AI Portfolio Architect module to use AI to generate optimal portfolios and find profitable investment opportunities.