Correlation Between Heineken and L’Oreal Co

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

By analyzing existing cross correlation between Heineken NV and LOreal Co ADR, you can compare the effects of market volatilities on Heineken and L’Oreal Co 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 Heineken with a short position of L’Oreal Co. Check out your portfolio center. Please also check ongoing floating volatility patterns of Heineken and L’Oreal Co.

Diversification Opportunities for Heineken and L’Oreal Co

0.81

Correlation Coefficient

Heineken  L’Oreal Co

Very poor diversification

The 3 months correlation between Heineken and L’Oreal is 0.81. Overlapping area represents the amount of risk that can be diversified away by holding Heineken NV and LOreal Co ADR in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on LOreal Co ADR and Heineken 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 Heineken NV are associated (or correlated) with L’Oreal Co. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of LOreal Co ADR has no effect on the direction of Heineken i.e., Heineken and L’Oreal Co go up and down completely randomly.

Pair Corralation between Heineken and L’Oreal Co

Assuming the 90 days horizon Heineken NV is expected to under-perform the L’Oreal Co. But the otc stock apears to be less risky and, when comparing its historical volatility, Heineken NV is 1.18 times less risky than L’Oreal Co. The otc stock trades about -0.3 of its potential returns per unit of risk. The LOreal Co ADR is currently generating about -0.05 of returns per unit of risk over similar time horizon. If you would invest  7,790  in LOreal Co ADR on October 26, 2024 and sell it today you would lose (386.00) from holding LOreal Co ADR or give up 4.96% of portfolio value over 90 days.

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

Heineken NV  vs.  LOreal Co ADR

Heineken NV

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Heineken NV has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fragile performance in the last few months, the Stock's basic indicators remain fairly strong which may send shares a bit higher in February 2025. The current disturbance may also be a sign of long term up-swing for the company investors.

LOreal Co ADR

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days LOreal Co ADR has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong fundamental indicators, L’Oreal Co is not utilizing all of its potentials. The recent stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Heineken and L’Oreal Co

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

The idea behind Heineken NV and LOreal Co ADR 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 Global Correlations module to find global opportunities by holding instruments from different markets.