Correlation Between Essentra Plc and Advanced Drainage

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

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

Diversification Opportunities for Essentra Plc and Advanced Drainage

0.41

Correlation Coefficient

Essentra Plc  Advanced Drainage

Very weak diversification

The 3 months correlation between Essentra and Advanced is 0.41. Overlapping area represents the amount of risk that can be diversified away by holding Essentra plc and Advanced Drainage Systems in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Advanced Drainage Systems and Essentra 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 Essentra plc are associated (or correlated) with Advanced Drainage. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Advanced Drainage Systems has no effect on the direction of Essentra Plc i.e., Essentra Plc and Advanced Drainage go up and down completely randomly.

Pair Corralation between Essentra Plc and Advanced Drainage

Assuming the 90 days horizon Essentra plc is expected to under-perform the Advanced Drainage. In addition to that, Essentra Plc is 1.1 times more volatile than Advanced Drainage Systems. It trades about -0.01 of its total potential returns per unit of risk. Advanced Drainage Systems is currently generating about 0.04 per unit of volatility. If you would invest  7,475  in Advanced Drainage Systems on September 23, 2024 and sell it today you would earn a total of  3,585  from holding Advanced Drainage Systems or generate 47.96% return on investment over 90 days.

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

Essentra plc  vs.  Advanced Drainage Systems

Essentra plc

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Essentra plc has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest fragile performance, the Stock's basic indicators remain stable and the current disturbance on Wall Street may also be a sign of long-run gains for the company stockholders.

Advanced Drainage Systems

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Advanced Drainage Systems 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 January 2025. The current disturbance may also be a sign of long-run up-swing for the company stockholders.

Pair Trading with Essentra Plc and Advanced Drainage

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

The idea behind Essentra plc and Advanced Drainage Systems 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 Equity Forecasting module to use basic forecasting models to generate price predictions and determine price momentum.