Correlation Between HCI and Lemonade

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

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

Diversification Opportunities for HCI and Lemonade

-0.05

Correlation Coefficient

HCI  Lemonade

Good diversification

The 3 months correlation between HCI and Lemonade is -0.05. Overlapping area represents the amount of risk that can be diversified away by holding HCI Group and Lemonade in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Lemonade and HCI 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 HCI Group are associated (or correlated) with Lemonade. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Lemonade has no effect on the direction of HCI i.e., HCI and Lemonade go up and down completely randomly.

Pair Corralation between HCI and Lemonade

Considering the 90-day investment horizon HCI is expected to generate 1.09 times less return on investment than Lemonade. But when comparing it to its historical volatility, HCI Group is 1.9 times less risky than Lemonade. It trades about 0.08 of its potential returns per unit of risk. Lemonade is currently generating about 0.05 of returns per unit of risk over similar time horizon. If you would invest  1,813  in Lemonade on October 26, 2024 and sell it today you would earn a total of  1,398  from holding Lemonade or generate 77.11% return on investment over 90 days.

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

HCI Group  vs.  Lemonade

HCI Group

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in HCI Group are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. Despite fairly unsteady fundamental indicators, HCI may actually be approaching a critical reversion point that can send shares even higher in February 2025.

Lemonade

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Lemonade are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. In spite of rather weak basic indicators, Lemonade exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with HCI and Lemonade

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

The idea behind HCI Group and Lemonade 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.

Check out your portfolio center.

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 Correlation Analysis module to reduce portfolio risk simply by holding instruments which are not perfectly correlated.