Correlation Between Alphabet and Digital Realty

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

By analyzing existing cross correlation between Alphabet Inc Class C and Digital Realty Trust, you can compare the effects of market volatilities on Alphabet and Digital Realty 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 Alphabet with a short position of Digital Realty. Check out your portfolio center. Please also check ongoing floating volatility patterns of Alphabet and Digital Realty.

Diversification Opportunities for Alphabet and Digital Realty

0.65

Correlation Coefficient

Alphabet  Digital Realty

Poor diversification

The 3 months correlation between Alphabet and Digital is 0.65. Overlapping area represents the amount of risk that can be diversified away by holding Alphabet Inc Class C and Digital Realty Trust in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Digital Realty Trust and Alphabet 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 Alphabet Inc Class C are associated (or correlated) with Digital Realty. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Digital Realty Trust has no effect on the direction of Alphabet i.e., Alphabet and Digital Realty go up and down completely randomly.

Pair Corralation between Alphabet and Digital Realty

Given the investment horizon of 90 days Alphabet Inc Class C is expected to generate 1.01 times more return on investment than Digital Realty. However, Alphabet is 1.01 times more volatile than Digital Realty Trust. It trades about 0.09 of its potential returns per unit of risk. Digital Realty Trust is currently generating about 0.08 per unit of risk. If you would invest  8,863  in Alphabet Inc Class C on September 19, 2024 and sell it today you would earn a total of  10,152  from holding Alphabet Inc Class C or generate 114.54% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	98.02%
Values	Daily Returns

Alphabet Inc Class C  vs.  Digital Realty Trust

Alphabet Class C

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Alphabet Inc Class C are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. Despite nearly conflicting basic indicators, Alphabet reported solid returns over the last few months and may actually be approaching a breakup point.

Digital Realty Trust

Risk-Adjusted Performance

16 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Digital Realty Trust are ranked lower than 16 (%) of all global equities and portfolios over the last 90 days. Despite nearly uncertain basic indicators, Digital Realty reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Alphabet and Digital Realty

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

The idea behind Alphabet Inc Class C and Digital Realty Trust 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 Idea Breakdown module to analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes.