Correlation Between Sims Metal and UNITED RENTALS

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

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

Diversification Opportunities for Sims Metal and UNITED RENTALS

0.63

Correlation Coefficient

Sims Metal  UNITED RENTALS

Poor diversification

The 3 months correlation between Sims and UNITED is 0.63. Overlapping area represents the amount of risk that can be diversified away by holding Sims Metal Management and UNITED RENTALS in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on UNITED RENTALS and Sims Metal 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 Sims Metal Management are associated (or correlated) with UNITED RENTALS. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of UNITED RENTALS has no effect on the direction of Sims Metal i.e., Sims Metal and UNITED RENTALS go up and down completely randomly.

Pair Corralation between Sims Metal and UNITED RENTALS

Assuming the 90 days horizon Sims Metal Management is expected to generate 1.48 times more return on investment than UNITED RENTALS. However, Sims Metal is 1.48 times more volatile than UNITED RENTALS. It trades about -0.15 of its potential returns per unit of risk. UNITED RENTALS is currently generating about -0.5 per unit of risk. If you would invest  775.00  in Sims Metal Management on September 24, 2024 and sell it today you would lose (60.00) from holding Sims Metal Management or give up 7.74% of portfolio value over 90 days.

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

Sims Metal Management  vs.  UNITED RENTALS

Sims Metal Management

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Sims Metal Management has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable basic indicators, Sims Metal is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

UNITED RENTALS

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days UNITED RENTALS has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound basic indicators, UNITED RENTALS is not utilizing all of its potentials. The current stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with Sims Metal and UNITED RENTALS

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

The idea behind Sims Metal Management and UNITED RENTALS 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 Analyst Advice module to analyst recommendations and target price estimates broken down by several categories.