Correlation Between Diageo Plc and Summit Materials

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

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

Diversification Opportunities for Diageo Plc and Summit Materials

-0.65

Correlation Coefficient

Diageo Plc  Summit Materials

Excellent diversification

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

Pair Corralation between Diageo Plc and Summit Materials

Assuming the 90 days trading horizon Diageo plc is expected to under-perform the Summit Materials. But the stock apears to be less risky and, when comparing its historical volatility, Diageo plc is 1.68 times less risky than Summit Materials. The stock trades about -0.04 of its potential returns per unit of risk. The Summit Materials is currently generating about 0.06 of returns per unit of risk over similar time horizon. If you would invest  2,960  in Summit Materials on October 4, 2024 and sell it today you would earn a total of  1,840  from holding Summit Materials or generate 62.16% return on investment over 90 days.

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

Diageo plc  vs.  Summit Materials

Diageo plc

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Diageo plc has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of comparatively stable forward indicators, Diageo Plc is not utilizing all of its potentials. The newest stock price uproar, may contribute to short-horizon losses for the private investors.

Summit Materials

Risk-Adjusted Performance

21 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Summit Materials are ranked lower than 21 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively uncertain basic indicators, Summit Materials unveiled solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Diageo Plc and Summit Materials

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

The idea behind Diageo plc and Summit Materials 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 Portfolio Analyzer module to portfolio analysis module that provides access to portfolio diagnostics and optimization engine.