Correlation Between International Business and FF European

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

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

Diversification Opportunities for International Business and FF European

0.37

Correlation Coefficient

International Business  FF European

Weak diversification

The 3 months correlation between International and FJ2B is 0.37. Overlapping area represents the amount of risk that can be diversified away by holding International Business Machine and FF European in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on FF European and International Business 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 International Business Machines are associated (or correlated) with FF European. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of FF European has no effect on the direction of International Business i.e., International Business and FF European go up and down completely randomly.

Pair Corralation between International Business and FF European

Considering the 90-day investment horizon International Business Machines is expected to under-perform the FF European. In addition to that, International Business is 2.05 times more volatile than FF European. It trades about -0.21 of its total potential returns per unit of risk. FF European is currently generating about -0.17 per unit of volatility. If you would invest  2,038  in FF European on October 5, 2024 and sell it today you would lose (40.00) from holding FF European or give up 1.96% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	85.0%
Values	Daily Returns

International Business Machine  vs.  FF European

International Business

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days International Business Machines has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy fundamental drivers, International Business is not utilizing all of its potentials. The recent stock price disarray, may contribute to short-term losses for the investors.

FF European

Risk-Adjusted Performance

0 of 100

Modest

Over the last 90 days FF European has generated negative risk-adjusted returns adding no value to fund investors. In spite of rather sound technical and fundamental indicators, FF European is not utilizing all of its potentials. The current stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with International Business and FF European

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

The idea behind International Business Machines and FF European 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 Risk-Return Analysis module to view associations between returns expected from investment and the risk you assume.