Correlation Between Basic Materials and DXC Technology

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

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

Diversification Opportunities for Basic Materials and DXC Technology

0.16

Correlation Coefficient

Basic Materials  DXC Technology

Average diversification

The 3 months correlation between Basic and DXC is 0.16. Overlapping area represents the amount of risk that can be diversified away by holding Basic Materials and DXC Technology in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on DXC Technology and Basic Materials 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 Basic Materials are associated (or correlated) with DXC Technology. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of DXC Technology has no effect on the direction of Basic Materials i.e., Basic Materials and DXC Technology go up and down completely randomly.

Pair Corralation between Basic Materials and DXC Technology

Assuming the 90 days trading horizon Basic Materials is expected to under-perform the DXC Technology. But the index apears to be less risky and, when comparing its historical volatility, Basic Materials is 3.42 times less risky than DXC Technology. The index trades about -0.17 of its potential returns per unit of risk. The DXC Technology is currently generating about 0.16 of returns per unit of risk over similar time horizon. If you would invest  10,679  in DXC Technology on October 6, 2024 and sell it today you would earn a total of  2,761  from holding DXC Technology or generate 25.85% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Insignificant
Accuracy	97.44%
Values	Daily Returns

Basic Materials  vs.  DXC Technology

Pair Trading with Basic Materials and DXC Technology

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

The idea behind Basic Materials and DXC Technology 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 Portfolio Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.