Correlation Between Basic Materials and Expedia

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

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

Diversification Opportunities for Basic Materials and Expedia

0.08

Correlation Coefficient

Basic Materials  Expedia

Significant diversification

The 3 months correlation between Basic and Expedia is 0.08. Overlapping area represents the amount of risk that can be diversified away by holding Basic Materials and Expedia Group in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Expedia Group 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 Expedia. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Expedia Group has no effect on the direction of Basic Materials i.e., Basic Materials and Expedia go up and down completely randomly.

Pair Corralation between Basic Materials and Expedia

Assuming the 90 days trading horizon Basic Materials is expected to under-perform the Expedia. But the index apears to be less risky and, when comparing its historical volatility, Basic Materials is 1.87 times less risky than Expedia. The index trades about -0.01 of its potential returns per unit of risk. The Expedia Group is currently generating about 0.08 of returns per unit of risk over similar time horizon. If you would invest  27,042  in Expedia Group on October 5, 2024 and sell it today you would earn a total of  30,719  from holding Expedia Group or generate 113.6% return on investment over 90 days.

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

Basic Materials  vs.  Expedia Group

Pair Trading with Basic Materials and Expedia

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

The idea behind Basic Materials and Expedia Group 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.

Check out your portfolio center.

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 Watchlist Optimization module to optimize watchlists to build efficient portfolios or rebalance existing positions based on the mean-variance optimization algorithm.