Correlation Between Diageo Plc and Constellation Brands

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

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

Diversification Opportunities for Diageo Plc and Constellation Brands

0.82

Correlation Coefficient

Diageo Plc  Constellation Brands

Very poor diversification

The 3 months correlation between Diageo and Constellation is 0.82. Overlapping area represents the amount of risk that can be diversified away by holding Diageo plc and Constellation Brands in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Constellation Brands 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 Constellation Brands. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Constellation Brands has no effect on the direction of Diageo Plc i.e., Diageo Plc and Constellation Brands go up and down completely randomly.

Pair Corralation between Diageo Plc and Constellation Brands

Assuming the 90 days trading horizon Diageo plc is expected to generate 0.67 times more return on investment than Constellation Brands. However, Diageo plc is 1.49 times less risky than Constellation Brands. It trades about -0.14 of its potential returns per unit of risk. Constellation Brands is currently generating about -0.12 per unit of risk. If you would invest  11,826  in Diageo plc on December 25, 2024 and sell it today you would lose (2,076) from holding Diageo plc or give up 17.55% of portfolio value over 90 days.

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

Diageo plc  vs.  Constellation Brands

Diageo plc

Risk-Adjusted Performance

Very Weak

Over the last 90 days Diageo plc has generated negative risk-adjusted returns adding no value to investors with long positions. Despite uncertain performance in the last few months, the Stock's forward indicators remain nearly stable which may send shares a bit higher in April 2025. The current disturbance may also be a sign of long-run up-swing for the company stockholders.

Constellation Brands

Risk-Adjusted Performance

Very Weak

Over the last 90 days Constellation Brands has generated negative risk-adjusted returns adding no value to investors with long positions. Despite fragile performance in the last few months, the Stock's basic indicators remain nearly stable which may send shares a bit higher in April 2025. The current disturbance may also be a sign of long-run up-swing for the company stockholders.

Pair Trading with Diageo Plc and Constellation Brands

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

The idea behind Diageo plc and Constellation Brands 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 Dashboard module to portfolio dashboard that provides centralized access to all your investments.